The central bank of Brazil has raised the key interest rate to 11.25 percent in an attempt to cool down soaring prices in one of the fastest growing economies of the world.
This is the first rate hike in the first month of their office under Brazil’s new President Dilma Rousseff and chief of central bank Alexandre Tombini.
Brazil recorded an inflation rate of 5.91 percent in 2010 and the government estimates it to remain above 5 percent in 2010.
However, sustained higher interest rates will attract excess foreign capital, making the local currency more expensive and hurting the country’s export. However, the central bank seems to be more concerned about curbing inflation and has warned of more rises in the future.
Brazil has witnessed huge levels of capital inflows as investors rush away from record low interest rates of developed economies.
However, the government is trying to bring down the consumer credit boom in the country which drove the country’s rapid domestic demand. Latin America’s biggest economy grew by 7 percent in 2010 and is expected to grow between 4-5 percent in 2011.
The central bank has already hiked the bank’s reserve requirements making less money available for lending.