Brazil boosts rates to fight inflation

Lula has a difficult balancing act ahead of him

Brazil is to raise its interest rate by one percentage point less than a month after the presidential election, in the hope of moderating rising inflation.

The central bank in South America's biggest economy announced its decision - the second such rise in two months - after its Monetary Policy Committee (Copom) met for the first time since the poll.

The increase took the benchmark Selic interest rate to 22%.

"An increase in expectations for inflation in 2003 prompted the Copom to raise the Selic rate," the bank said.

The new government of left-wing Workers' Party candidate Luiz Inacio Lula da Silva, or "Lula" as he is called, takes office in January, and there is still one central bank meeting left before then.

A further rise cannot be ruled out.

Tugged in two directions

While the economics underlying the rise are relatively uncontroversial - a slumping currency in the months before the election drove the price of imported goods sky-high - the decision could leave Lula with a problem on his hands.

He has a difficult balancing act ahead of him, trying to keep the International Monetary Fund sweet while riding out the pummelling that global financial markets administered to Brazil over fears of what a electing a left-wing president could mean.

At the same time, the electorate is expecting a change from the old guard of free-marketeers whose candidate lost comprehensively to Lula.

Ideally, the new government would prefer rates to drop so as to make it easier to create urgently needed jobs.

But now that Lula is at the top table, the relentless battering of the real - Brazil's currency - has ceased.

The past four days have produced a 5.5% rise, and the interest rate decision triggered a further 0.5% gain.