Deflation fears everywhere - but Brazil hikes interest rate to 12.25% to slow inflation

BRASÍLIA (AFP, BLOOMBERG) - Brazil's central bank on Wednesday lifted its key interest rate by half a percentage point to 12.25 per cent, as Latin America's largest economy fights to keep a lid on inflation and yet boost low growth.

Last month, the bank also raised the rate by 50 basis points, to 11.75 per cent, surprising many analysts who had expected a rise of just a quarter percentage point.

That rise followed a one quarter point increase in late October, the first since April, as freshly re-elected leftist President Dilma Rousseff selected a new finance team to tackle rising inflation which last year broke through a government target ceiling of 6.5 per cent. The official target is 4.5 per cent.

The world's largest emerging market after China faces faster inflation in 2015 due to increases in government- controlled prices such as electricity and transport coupled with the sharp depreciation of the Brazilian real which makes imports more expensive.

The real has declined 14.9 per cent in the last six months, the third-worst performance among the 16 most traded currencies tracked by Bloomberg.

While the bank focuses on rising prices as well as low growth, forecast to come in at barely zero for the year just ended and set to be equally pallid this year, industry wants lower rates to kickstart a recovery.

Last year Brazil slid briefly into recession last year on four straight years of low growth and some forecasters are warning this year is likely to see a repeat.