Brazil Bank Sees Faster Inflation as Economy Recovers
Brazil’s central bank forecasts faster inflation in Latin America’s biggest economy over the next two years, prompting traders to bet the benchmark interest rate may be raised as early as January.
Policy makers expect an annual inflation rate of 4.6 percent in the first quarter of 2011, up from 4.4 percent in 2010 and 4.2 percent for 2009, according to the so-called reference scenario in the bank’s quarterly inflation report posted today on its Web site. The bank targets annual inflation of 4.5 percent, plus or minus two percentage points.
To slow inflation as economic growth quickens, the central bank will raise the benchmark interest rate in January to 9.03 percent from 8.75 percent, according Bloomberg estimates based on overnight rate-futures contracts. The rate may rise as far as 12.33 percent by December 2010, according to the estimates.
“The central bank report adds fuel to the fire — you have an inflation forecast, though it is in the long-term horizon, above the mid-point of the target,” Zeina Latif, chief economist at ING Bank NV in Sao Paulo, said in phone interview. “Given monetary policy impact has lags, traders increased bets the central bank will have to raise rates next year.”
Yields on the Brazilian interest-rate futures rose for the ninth time in 10 days, with the January 2011 contract rising 4 basis points to 10.23 percent at 2:29 p.m. New York time. It’s the highest yield since June 12.
Pacing
“The risks of the central bank having to raise interest rates in the next two quarters are now higher than zero,” Alexandre Lintz, chief strategist with BNP Paribas in Sao Paulo, said in a phone interview cash advance no faxing.
Still, Lintz forecasts that, given inflation expectations, the central bank will have room to keep rates unchanged throughout 2010.
Cabinet Chief Dilma Rousseff said today that she couldn’t predict when benchmark interest rates could fall, and that the country’s “economic fundamentals” point to a decline in rates in the future.
Economic data signal “the pace of economic activity growth accelerated” in the third quarter, policy makers said in the report.
Interest rate cuts, higher public spending, and improvements in labor and credit markets will anchor the domestic demand that will in turn “sustain” the economic recovery, they said.
Emerged From Recession
Brazil’s $1.6 trillion economy officially emerged from a recession in the second quarter. Gross domestic product expanded 1.9 percent in the April-through-June period from the previous quarter, beating analysts’ expectations for a 1.7 percent rise.
Slower economic growth helped rein in prices, allowing the central bank to slash the benchmark interest rate to a record 8.75 percent from a two-year high of 13.75 percent in the beginning of the year.
The bank’s June report had forecast annual inflation at 4.1 percent for the first quarter of 2011, 3.9 percent for 2010, and 4.1 percent for this year.
The central bank kept its 2009 economic growth forecast at 0.8 percent, unchanged from its previous forecast.
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