Brazil raises rates to highest level in 6 years

Brazil has raised interest rates to the highest level in six years as the government struggles to regain investors' confidence and put Latin America's biggest economy back on the path to growth.

The country's central bank raised the benchmark Selic rate late on Wednesday by an expected 50 basis points to 13.25 per cent - the highest level since January 2009.

In a terse statement, the central bank said its unanimous decision to raise rates for the fifth consecutive meeting had considered "the macroeconomic outlook and perspectives for inflation", without adding further details.

While Brazil's economy is expected to contract by more than 1 per cent this year, marking the country's deepest recession for a quarter of a century, inflation has surged above the central bank's 4.5 per cent target.

In March inflation accelerated to 8.13 per cent on an annual basis. The central bank has already stated that there is a 90 per cent possibility that 2015 year-end inflation will exceed the upper limit of the target range - 6.5 per cent - for the first time since 2003.

"The 50 basis point rate hike was, in our assessment, consistent with the very challenging current and prospective inflation outlook," said Alberto Ramos at Goldman Sachs.

He added that the decision was also consistent with "abundant evidence of high and sticky services inflation, and recent statements by senior central bank officials that the progress achieved so far to drive inflation to the 4.50 per cent target by year-end 2016, albeit positive, was not yet sufficient".

Wednesday's decision by the central bank was also welcomed by analysts as further proof of the government's efforts to return to more orthodox economic policies to attract investors.

Brazil's central bank, one of the few in the world that is not formally independent of the federal government, sparked heavy criticism in 2012 for pushing interest rates down to a record low of 7.25 per cent in a bid to boost the flagging economy.

However, after winning last year's elections by one of the narrowest margins in the country's history, President Dilma Rousseff performed a U-turn in economic policy.

While the central bank has raised interest rates since the October election, the new market-friendly finance minister Joaquim Levy has introduced measures to plug a hole in Brazil's fiscal accounts and safeguard the country's all-important investment-grade credit rating.

Joao Pedro Ribeiro at Nomura said he expected the central bank to raise the Selic rate by 25 basis points at its next meeting in June, but did not rule out the possibility of another 50 basis point increase. He said the decision would depend on inflation data, the performance of Brazil's volatile currency, 2016 inflation expectations, and the progress made by the government on the fiscal front.

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