Brazil is widely expected to raise interest rates for the sixth consecutive time on Wednesday, taking borrowing costs back to double digits as policymakers race to contain naggingly high inflation in Latin America's largest economy.
An overwhelming majority of analysts polled by Reuters last week expect the central bank to hike its benchmark Selic rate a half percentage point to 10 percent, the highest since March 2012.
The return to double digits is considered a political setback for President Dilma Rousseff, who made lower rates a key economic goal of her government. The Selic stood at 10.75 percent when she took office in 2011.
After raising rates early in her term, the central bank aggressively slashed the Selic to a record low 7.25 percent in October 2012. The government had hoped the cuts would usher in a new era of cheap credit and sustained economic growth.
However, lower rates failed to speed up the economy, which was held back by another historical drag on Brazilian growth: high inflation. Inflation forced the central bank's monetary policy committee, or Copom, to change course, raising the benchmark rate by 2.25 percentage points since April in a bid to bring annual inflation back to target.
"We expect the Central Bank to raise the Selic policy rate by 50 basis points and to make no changes to the Copom statement, which we believe may be interpreted by investors as a sign that the hiking cycle will continue," HSBC economist Constantin Jancso said in a note to clients.
HSBC expects the bank to increase rates to 10.25 percent next year to control prices and reduce inflation expectations. The bank is supposed to set rates in a way that keeps consumer price inflation close to a 4.5 percent-a-year target, plus or minus 2 percentage points.
Yields paid on Brazil's interest rate futures contracts rose slightly early on Wednesday, consolidating bets that the bank will hike the Selic by half a percentage point later in the day. The yield curve indicates a 98 percent probability of the bank raising rates to 10 percent, according to Thomson Reuters data.
The central bank has raised rates much more than expected this year, regaining some of its credibility as an inflation fighter even as the benchmark IPCA consumer price index remains above the center of the target range.
At the same time, the central government is struggling to convince markets it is ready to control spending in order to avoid a downgrade of its sovereign credit rating next year.
The erosion of government accounts comes as spending grows faster than revenue. Service-industry costs are also rising and government-controlled prices such as bus fares and fuel prices are expected to increase.
This has prompted investors and analysts to bet that interest rates will keep climbing next year. Most economists expect Brazil to raise rates to 10.50 percent next year, according to the latest weekly central bank survey.
Brazil, which already has the highest interest rates among major economies, is one of the few countries in the world still boosting borrowing costs. Other emerging-market countries such as Mexico and Poland are slashing interest rates to cope with an international economic slowdown.
Annual inflation climbed less than expected in mid-November, but remains well above the center of the target and is under pressure from rising food prices. The IPCA-15 consumer price index rose 5.78 percent in the 12 months to mid-November.
Investors are paying close attention to an expected increase in fuel prices this year. State-run oil company Petroleo Brasileiro SA has sustained heavy losses by keeping fuel prices below world market levels to help the government contain inflation.
High inflation is blamed for the weak performance of the Brazilian economy, which has also struggled in the last three years because of supply bottlenecks spurred by high taxes, burdensome red tape and a crumbling infrastructure.
The Brazilian economy may have actually contracted slightly in the third quarter from the previous quarter, some economists predict, evidence of the erratic pace of an economy that is expected to grow around 2.5 percent this year.
Another immediate risk to the economy lays in the hands of the Supreme Court, which on Wednesday begins reviewing a savings accounts case that could cost banks more than 100 billion reais ($44 billion) and contract credit.
Things are not looking brighter for next year.
Higher interest rates and an expected withdrawal of U.S. monetary stimulus could further slow the economy in 2014, when Rousseff is expected to run for another four-year term. Economists see the economy growing only around 2.1 percent in 2014.
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