Last week Brazil became the first in Latin America to raise interest rates. Central Bank President Henrique Meirelles lifted the benchmark lending rate to 9.5% from a record-low 8.75% to rein in inflation, following a unanimous vote.of the eight-member monetary policy committee.

This is a major development. Brazil’s surging economic growth is positive for housing investors, though rising interest rates could eventually choke off the upward appreciation of property prices.

Brazil’s real has gained 9.4% in the past three months, the best performer among major emerging-market currencies, after gaining 33% last year, benefiting from the fact the Brazil was relatively untouched by the global recession.

The real’s rally prompted Finance Minister Guido Mantega to levy a 2% tax on foreign purchases of stock and fixed-income assets in October. He has recently warned that he may take “further measures” to limit currency gains.

Brazil’s foreign reserves rose 1.3% in April to $247 billion, as the central bank stepped up dollar purchases in to check the real’s rise. Reserves have surged from $56 billion four years ago.

Brazil’s gross domestic product (GDP) is expected to grow 6% this year, the second-fastest fastest growth for two decades, according to the median forecast in central bank’s April 30 survey of about 100 economists published on its website.

Inflation quickened to an 11-month high in mid-April. Consumer prices in Brazil will rise 5.42% this year, the survey suggested.

Some had expected the monetary policy committee to be more tolerant of inflation after the departure of board members Mario Mesquita and Mario Toro, but Meirelles recently said that the central bank will take “vigorous” action to ensure that inflation converges to its target over the next 12 months.  The central bank’s annual inflation target is 4.5%. Unemployment remained stable in March at 7.6%  

Brazil’s economy is “turning red hot” and growing “too fast for lasting health,” according to Marcelo Carvalho, chief economist at Morgan Stanley in Sao Paulo, who forecasts 6.8 percent growth in gross domestic product this year. He forecast that interest rates could be raised by a total of 4% this year and next.

Brazil’s 4.28% real interest rate is the third-highest in the world, after Croatia and Latvia, according to Bloomberg News, which tracks interest rates in 53 countries.