Brazil Demand Reducing Slack in Economy, Minutes Says

Brazilian policy makers said that rising domestic demand is reducing slack in the economy and increasing the risk that inflation may quicken, according to the minutes of their last meeting.

The bank’s board, led by President Henrique Meirelles, voted unanimously last week to hold the overnight rate at 8.75 percent, as forecast by all 43 economists surveyed by Bloomberg.

A rebound in domestic demand is “reducing the margin of idleness in the factors of production,’ policy makers said in the minutes of their Jan. 26-27 meeting published today on the central bank’s Web site. ‘‘Monetary policy will be promptly adjusted to the circumstances,” should threats to the inflation target increase.

The yield on the interest rate futures contract due January 2011, the most-traded on Sao Paulo’s BM&F exchange, fell 6 basis points to 10.29 percent at 6:46 a.m. New York time. The real, which has weakened the most against the U.S. dollar this year among 16 major currencies tracked by Bloomberg, fell 0.88 percent to 1.8690 per dollar from 1.8526 yesterday.

Brazil’s inflation outlook has worsened as rising domestic demand leads the International Monetary Fund and Brazil’s finance ministry to raise their growth forecasts for Latin America’s largest economy.

Inflation, which has been below the government’s 4.5 percent target since August, may have quickened to 4.55 percent last month, according to a Bloomberg survey of 12 analysts. The January IPCA price index is scheduled to be disclosed tomorrow.

Rate Increases

Inflation will accelerate to 4.62 percent by year-end, prompting the central bank to start raising rates in April, the median forecast in a central bank survey of about 100 economists published Jan. 29 shows.

“Should the inflation forecast continue to quicken, policy makers may raise rates next month,” Andre Perfeito, an economist at Gradual Investimento in Sao Paulo, said in a phone interview. “The central bank is clearly signaling that a rate increase will be necessary to keep the inflation outlook in line with its target.”

The central bank removed from the minutes, as well as last week’s statement, language thtat the record low rate was adequate for containing inflation and fueling economic growth.