Brazil’s central bank raised interest rates again on Wednesday night as the country’s inflation outlook continued to worsen.

The move comes as the government considers measures to tighten fiscal policy as an additional weapon against inflation.

However, the government is also giving its support to measures that would increase spending and taxation, which analysts say would push fiscal policy in the opposite direction.

The bank lifted its target overnight rate by 0.5 percentage points from 11.75 per cent. The bank began raising the rate in April after three years of monetary loosening.

Any increase is likely to add to the flow of speculative money to Brazil’s financial markets, putting further upward pressure on the currency.

Brazil has the world’s highest real interest rates and its recent promotion to investment grade by ratings agencies Standard & Poor’s and Fitch is likely to add to its appeal.

Consumer price inflation has risen above the government’s target rate of 4.5 per cent a year in recent months and was 5.25 per cent in the year to mid-May. According to a recent central bank survey of market economists, the rate is expected to reach 5.48 per cent by the year end.

Rising prices have caused mounting concern and the government is expected shortly to announce measures to contain rising public spending.

The government aims to achieve annual primary budget surpluses (before debt repayment) of 3.8 per cent of gross domestic product. Its overall (or “nominal”) deficit is expected to fall to 1.1 per cent of GDP by the end of the year – down from 4.6 per cent at the end of 2003 – and to zero by 2010.

But the primary surplus has been running at 4.5 per cent of GDP over the past year and 6.5 per cent in the year to date, mainly as a result of bigger-than-expected tax revenues driven by domestic growth and by delays in executing government investment plans.

The government is expected to increase its primary surplus target to 4.3 per cent of GDP, an additional saving of about R$13bn ($8bn, €5.2bn, £4.1bn). The increase is likely to be introduced through a fiscal stability or sovereign wealth fund, although it is not clear whether the additional money would be used to pay down public debt at a faster rate or kept in reserve as a counter-cyclical contingency.

“The government suddenly has all this money,” said an economist at an international bank who asked not to be named. “If it doesn’t put it away as savings it will just have to spend more. And the one thing that really worries [President Luiz Inácio Lula da Silva] is inflation.”

Yet many economists are worried that the government’s fiscal efforts are coming primarily on the revenue rather than the spending side. Also on Wednesday, government supporters in Congress were pushing for approval of a bill that would revive a tax on financial transactions, formerly known as the CPMF, that was extinguished by Congress in December in a resounding defeat for the government.

The tax would be used to cover about R$10bn in additional spending on health that would be earmarked by a related bill also expected to be put to a vote this week.

“Fiscal policy is absolutely expansionary,” the economist said. “Revenues are rising by double digits and the government is spending more on social programmes and public sector payroll. It is not making any effort to cut spending.”