Rising wages and consumer spending are fueling cost-of- living increases. Average inflation-adjusted wages rose 4 percent in May from a year ago to 1,567 reais per month. The minimum wage will rise more than 13 percent next year under a government formula. Sixty-six percent of Brazil's pension and welfare payments are linked to that wage. Retail sales rose 0.6 percent in May.

"The labor market shows, as yet, no sign of real adjustment," Paulo Vieira da Cunha, a former central bank director who is now a partner at Tandem Global Partners LLC, said in a telephone interview. "You have to have nominal demand converging more quickly to the real economy, and for that you need interest rate hikes."

The yield on interest-rate futures due in October rose to 12.42 percent, suggesting investors are split on whether the central bank will lift the benchmark rate in August, according to data compiled by Bloomberg. The bank has boosted the rate 150 basis points this year.

Inflation may quicken to 7 percent this year and end 2012 at 5 percent if policy makers don't raise borrowing costs in August after lifting them tomorrow, Vieira da Cunha said.

Eoin Treacy's view Brazil has been subject to a remarkable economic transformation over the last decade; moving from serial defaulter to creditor status. This was enabled by the central bank's tough inflation fighting stance, enlightened political governance and the tailwind of a major commodity bull market. Currency inflows saw the Real double against the US Dollar and the Bovespa Index was a global outperformer.

Over the last two years a number of headwinds have appeared. Inflationary pressures have mounted as commodity prices increased and strong domestic economic growth has spurred wage demands. Massive infrastructure development is planned, not least for the Olympics and World Cup respectively which will be expensive. The discovery of the Tupi oil field required massive equity issuance by Petrobras which has acted as a brake for the stock market. Efforts to contain currency appreciation have also weighed on investor sentiment.

The Brazilian Index's yield at 3.92% and P/E of 9.28 suggest that this is not an expensive market. However the Bovespa has been ranging for the last 18 months following an impressive rebound from the 2008 nadir and is now testing the May 2010 low. It has posted a progression of lower rally highs since November and while somewhat oversold in the short-term a sustained move above 64000 will be required to question 9-month supply dominance.