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Brazil’s central bank will raise the benchmark interest rate no later than July to keep inflation in check as the economy recovers more quickly than expected, former monetary policy director Rodrigo Azevedo said.

Central bank policy makers led by President Henrique Meirelles will lift the so-called Selic rate to 10 percent by the end of 2010 from 8.75 percent now in part because of increased government spending before the presidential election, Azevedo said in an interview in Sao Paulo.

“The risk is that the central bank will have to raise rates sooner rather than later,” said Azevedo, currently a partner at JGP SA, which manages $1.8 billion. “A one-digit Selic rate isn’t yet here to stay.”

Yields on Brazilian interest-rate futures contracts rose for the seventh time in eight sessions yesterday, as traders increased bets the central bank will lift rates next year. The yield on the contract due January 2011, the most traded on Sao Paulo’s BM&FBovespa SA, was 10.14 percent yesterday, up 50 basis points from Sept. 11.

Policy makers halted seven months of cuts to the benchmark interest rate earlier this month on signs Latin America’s biggest economy had emerged from its first recession since 2003. They said in the minutes of their Sept. 1-2 meeting that a record low 8.75 percent Selic rate was adequate to spark growth without igniting inflation.

The annual inflation rate, as measured by the benchmark IPCA inflation index, will slow to 4.3 percent next year from 4.31 percent in 2009, according to a weekly central bank survey of about 100 economists taken Sept. 18. The central bank’s target is 4.5 percent.

Fiscal Stimulus

A Selic rate at 8.75 percent is too low to keep inflation in line with the target as investments and exports rebound and lending growth spurs domestic demand, said Azevedo, who served as monetary policy director at the central bank from October 2004 through May 2007.

Azevedo predicts the government won’t remove fiscal stimulus measures in 2010 because of the presidential election in October. The primary budget surplus, which excludes interest payments, will be about 1.7 percent of GDP next year compared with an estimated 1.4 percent in 2009 and 3.7 percent in 2008, according to JGP forecasts.

Meirelles, speaking in Brasilia on Sept. 15, urged Brazilian companies to resume investments so they can meet growing demand and allow the country to grow without “creating macroeconomic imbalances.”

Latin America’s largest economy officially emerged from a recession in the second quarter, powered by domestic demand that offset a near standstill in investment after two straight quarters of contraction. Gross domestic product expanded 1.9 percent in the April-June period from the previous quarter, beating analyst expectations for a 1.7 percent rise.

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