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Analysis: Brazil markets welcome hawkish central bank but wary of political, fiscal risks

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BRASILIA, Aug 5 (Reuters) – Brazil’s central bank made clear on Wednesday it will do whatever it takes to tame inflation, a move that investors welcomed, but the prospect of significantly higher borrowing costs than envisaged only a few months ago may not calm local currency and rates markets for long.

The central bank’s tough stance on inflation, while likely to support the real and flatten rates curves in the near term, comes amid deepening fiscal and political uncertainty ahead of a presidential election in October next year, analysts say.

Few question the central bank’s intentions or doubt its credibility. But the risks outside the central bank’s control look set to keep volatility high, whatever direction the currency or rates go.

The central bank hiked the benchmark Selic rate by 100 basis points to 5.25%, its biggest increase in 18 years. More significantly, it said it stands ready to repeat the move at its next meeting and tighten policy beyond…

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