Brazil to lift rates next week close to double-digit zone - Reuters poll

By Silvio Cascione

SAO PAULO (Reuters) - Brazil's central bank will very likely raise interest rates for a fifth straight meeting next week, taking them closer to double-digit levels in an effort to convince investors of its commitment to bring down inflation.

All but two of the 65 economists polled by Reuters this week expect the bank to raise its benchmark rate by 50 basis points on Wednesday to 9.50 percent, the highest level among the world's largest economies.

The statement explaining the decision will be as closely watched as the rate itself. Economists will look for clues on whether the bank will take the so-called Selic rate to the symbolic mark of 10 percent as soon as next month. That was a nearly unthinkable scenario when the year started. It still seems unlikely to many as economic growth continues to sputter.

Most economists continue to expect the bank to hold rates at 9.75 percent by year-end, keeping them unchanged throughout 2014 as President Dilma Rousseff likely runs for re-election.

A growing number of forecasters, 19 out of 64, see rates climbing to 10 percent by November, in line with traders' views priced into interest rate futures contracts.

"If you look at the central bank's own estimates, you can see that they need to do more to bring inflation closer to the centre of the target," said Rodrigo Melo, chief economist at asset management firm Icatu Vanguarda, in Rio de Janeiro.

Only four out of 43 economists expected double-digit rates this year in the prior Reuters poll, in August. In January, all forecasters thought rates would remain at a record low of 7.25 percent for the whole year.

The central bank targets consumer inflation at 4.5 percent, with a tolerance margin of two percentage points. It has overshot that central target for over three years and will likely stay high for at least two years more, according to official estimates, clouding the outlook for much-needed long-term investments and eroding consumers' purchasing power.

PLENTY OF WORK TO DO?

Among those still predicting single-digit rates, many are already inclined to review their forecasts upward, especially after central bank director Carlos Hamilton Araujo said last week that monetary policy still had "plenty of work to do".

"We're waiting for what the central bank says after next week's meeting to review our rate outlook. But it is almost certain that we will see double-digit interest rates soon," Rosenberg & Associados economists Thais Marzola Zara and Fernando Parmagnani wrote in a note.

Lifting rates to double-digit levels could be seen as a demonstration of independence by the central bank, under fire from several economists for allegedly yielding to interference by Rousseff. For many economists, it is also the only tool left for the government to curb inflation as increased government spending boosts prices and limits the room for further tax cuts.

"And there is also the exchange rate problem. The dollar is at 2.2 reais for now, but as the Fed starts tapering by the end of this year or early next year, you may see the real dropping again. This means more inflation, and certainly higher rates," said Icatu Vanguarda's Melo.

A Reuters poll on Thursday showed the real is set to weaken over 8 percent in the year ahead .

Renewed signs of economic sluggishness may keep the central bank reluctant to be too aggressive. Brazil's economy probably slowed sharply in the third quarter, according to economists' forecasts, and is likely to remain weak in 2014 --the fourth straight year of frustrating economic growth.

Central bank president Alexandre Tombini reinforced those expectations by saying that inflation is already under control, while speaking at a conference in London earlier this week.

"We are bringing it closer to the target," Tombini said.

The poll was conducted from Monday to Thursday. The central bank announces its monetary policy decision Wednesday evening.

(Reporting by Silvio Cascione; editing by Andrew Hay)

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