Brazil's central bank appeared closer to raising interest rates again after data on Wednesday showed that annual inflation hit a two-year high and credit continued to boom.
Higher rates could further fuel a currency rally that has worried the government and industry alike.
The latest data, however, could leave the central bank little option but to increase borrowing costs as soon as its next meeting on March 2, on top of a half-point hike last week.
The 12-month benchmark inflation rate, as measured by the IPCA-15 price index, hit 6.04 percent through mid-January — its highest since mid-December 2008 and well above the center of the government's target range of 2.5 percent to 6.5 percent.
A jump in food prices helped pull the price index higher, reflecting a trend in inflation rates around the world.
Prices rose across the board. Transportation, for example, gained as bus fares went up.
A surge in credit last year helped drive up prices. The central bank Wednesday reported that outstanding loans in the banking system shot up 20.5 percent in 2010 from 2009.
"Monetary policy needs to keep getting tighter in the short-term. There's nothing else to do," said Flavio Serrano, senior Brazil economist at Espirito Santo Investment Bank in Sao Paulo.
The inflation rate could get closer to 6.5 percent, the target range ceiling, before it falls back, Serrano added, though still above 4.5 percent at year-end.
Last week the central bank raised its benchmark lending rate to 11.25 percent from 10.75 percent, its first rate hike since July.
Minutes from that meeting — the first under new central bank chief Alexandre Tombini — are due on Thursday. They could help explain how far policy makers might take rates, after they said last week's move was the start of a "process of adjustment of the benchmark interest rate."
Yields on interest rate futures contracts edged higher Wednesday, as investors bet on higher lending rates in coming months.
The bank cannot increase Brazil's borrowing costs — already among the world's highest — without likely strengthening the currency even more.
The real firmed 4.6 percent against the dollar last year and 34 percent against the dollar in 2009, as investors poured money into Brazil in search of fat yields.
The strong real has hurt exporters, with industry sluggish as flush consumers rack up purchases of now-cheaper imports.
With interest rates near zero in many still-struggling major economies, the strong growth of some developing nations has drawn investors in droves, fanning global tensions.
Brazil's government has tried several methods to cool credit and brake the currency, such as making banks hold onto more money from deposits and selling currency derivatives.
On Tuesday, the central bank said it could start offering currency forwards in market auctions.
Such measures are already slowing lending, the government says.
Unemployment and wage data on Thursday could show how hot demand could get in Brazil.
Record-low unemployment has driven salaries higher, fueling price gains in a cycle that has elevated many of Brazil's poor into the middle class but also increased the cost of living.
With consumers unlikely to cut back on buying, the government could instead tighten its own purse-strings, said Thiago Curado, an analyst with Tendencias consultancy in Sao Paulo.
The government of Dilma Rousseff, in power less than a month, has promised substantial budget cuts to cool the booming economy, which likely grew about 7 percent last year and could grow around 4.5 percent this year.
A proposal for those cuts is expected in February.
"The economy has very little space to absorb shocks," Curado noted. "The magnitude of possible rate hikes is under discussion, but clearly there will be more."
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