Brazil set to hike interest rates again to rebuild confidence
* Central bank likely to hike Selic rate by 50 bps
* Weaker currency adds to inflationary pressures
* Authorities try to regain investors' confidence
BRASILIA, Aug 28 (Reuters) - Brazil will likely increase interest rates for a fourth straight time on Wednesday, keeping up its aggressive campaign to fight inflation and regain investors' trust in Latin America's largest economy, economists said.
Like other emerging economies, Brazil is struggling with a massive outflow of capital that has dragged down the value of its local currency and increased costs for companies indebted in U.S. dollars.
That is specially worrying for Brazil, which was already suffering with high inflation, soft consumer demand and dwindling investor appetite as its economy struggles to return to the glory days of above 4 percent growth per year.
The central bank's monetary policy committee, or Copom, is widely expected to deliver another half a percentage point hike on Wednesday to ease those inflationary fears and rebuild confidence eroded by erratic government policies.
Forty-four out of 46 economists polled by Reuters expect the bank to raise its benchmark Selic rate to 9 percent on Wednesday.
"The sluggish real business cycle dynamics, the recent moderation in inflation, the sharp deterioration of business and consumer confidence...are likely to tilt the balance of views within the Copom towards repeating the July 50-basis-point rate hike," Alberto Ramos, chief Latin America economist with Goldman Sachs, said in a note to clients.
An overwhelming majority of market traders are also betting on a half a percentage rate hike. Until recently, interest rate future contracts <0#2DIJ:> were pricing a more aggressive rate increase as a sharp depreciation of the real raised worries over inflationary pressures from costlier imported goods.
However, central bank chief Alexandre Tombini threw cold water on those expectations by saying on Aug. 19 that the steep rise in the yield of interest rate future contracts was excessive. The bank also launched a $60 billion intervention program to halt the plunge of the real that has weakened about 14 percent this year.
The central bank has argued that higher inflation ultimately hurts the economy by curbing investment and spending from local companies and families. The Brazilian economy likely rebounded in the second quarter, but recent data shows that the recovery will again disappoint this year with growth of just 2 percent.
The bank started to hike the Selic in April, surprising investors with the aggressive pace of tightening that brought rates from record lows of 7.25 percent to 8.50 percent in July.
Annual inflation has eased since then, but at 6.27 percent remains well above the mid-point of the official year-end target of 4.5 percent plus or minus two percentage points. Inflation expectations also remain high for next year.
The inflation problem partly stems on a flurry of stimulus packages by President Dilma Rouseff's government that also raised tensions between her administration and the central bank.
The government's aggressive spending is seen as one of the main reasons why the central bank started to hike rates this year even when the economy struggles to find it footing.
Making things worse for the administration is a likely withdrawal of monetary stimulus by the United States, which has sparked an exodus of investors from emerging markets.
Finance Minister Guido Mantega has blamed the U.S. Federal Reserve for fueling a "mini-crisis" with confusing policy messages that have roiled global markets.
(Reporting by Alonso Soto; Editing by Leslie Gevirtz)