Brazil raises rates to halt slide

Brazil's central bank raised interest rates yesterday in an increasingly desperate bid to stem the continued flow of dollars leaving the country since the government devalued the real.

With the currency coming under renewed pressure at the start of trading, when it plunged to 1.93 to the dollar from 1.82 at Tuesday's close, the central bank increased its lending rate for banks to 34 per cent from 32.5 per cent to make it more costly for speculators to buy dollars and to give investors a better return for their money.

Currency dealers blamed rate rise on the unexpectedly heavy outflow of $542 million on Tuesday, which raised losses for the month to about ?8.5 billion.

The move helped to stabilise the real, but the currency is continuing to give rise to concern among Brazil's neighbours, including the US where the White House said President Clinton was getting personally involved in discussions with his advisers about the situation.

The US has 2,000 corporations and banks in Latin America's largest economy.

The Brazilian government expects that the real's wild swings, which were triggered by the government's decision on January 15 to abandon its peg to the dollar, will diminish within a week.

"The transition always generates tension," presidential press spokesman Sergio Amaral said. "This is the initial phase, and it has a name: overshooting, which mean exaggeration."

The government predicts the real will settle at around 1.78, as the market finds its level in the new era of a free-floating real after four years of tight control by the central bank. So far it has lost about 36 per cent of its value.

Yesterday's emergency rate rise came despite a victory in the senate for the government in its efforts to cut the budget deficit this year by 28 billion reals, or about $14.8 billion.