Brazil’s Industrial Output Rebounds in January

Brazil’s industrial output rebounded in January after contracting for two consecutive months, cementing expectations policy makers will start raising borrowing costs no later than April to keep a lid on inflation.

Output in January rose 1.1 percent from December, the national statistics agency said today in Rio de Janeiro, matching the median estimate of 24 analysts in a Bloomberg survey. Production rose 16 percent from a year earlier.

Inflation above the central bank’s 4.5 percent target coupled with growing evidence that Latin America’s biggest economy is expanding at a fast pace will “inevitably” prompt policy makers to begin increasing the benchmark interest rate in the next two months, according to Dalton Gardiman, chief economist at Banco Bradesco BBI.

“Today’s figure is yet more evidence supporting the need for an interest rate increase,” Gardiman said in a phone interview from Sao Paulo. “We are expanding at a pace that will inevitably lead to a rate increase at the latest in April.”
The yield on interest rate futures contracts due in January 2011, the most traded on the Sao Paulo stock exchange, fell three basis point to 10.44 percent at 8:48 a.m. New York time. The real, which has fallen 2.4 percent against the U.S. dollar this year, rose 0.44 percent to 1.7837 per dollar.

Analysts expect Brazil’s $1.6 trillion economy to expand 5.5 percent this year, according to a survey of 100 analysts published March 1 by the central bank. Goldman Sachs Group Inc. raised its forecast to 6.4 percent and may revise it again to as high as 7 percent, chief economist said Feb. 22.

Selic Bets
Traders bet policy makers will increase the so-called Selic rate by at least a quarter point at their March 17 policy meeting, Bloomberg estimates based on interest rate-futures show. Economists forecast the central bank will wait until April before lifting the record-low rate for the first time since September 2008, according to the central bank survey.

“The fact is economic activity is rebounding and inflation is quickening,” Maristella Ansanelli, chief economist at Banco Fibra SA, said in a phone interview. “In February, preliminary figures show activity will be stronger than in January.”

Ansanelli expects a 50 basis point increase in April to 9.25 percent.

Fourteen of 27 industries measured by the statistics agency saw production expand in January. Production of metals rose 12 percent from December, while electronics manufacturers increased output by 14.3 percent.

Car manufacturers and Vale SA, the world’s largest iron-ore producer, are among companies boosting output as domestic demand and trade rise.

Unpopular Steps
Vehicle production rose 24 percent in February to 253,176 units. Vale said on Feb 10 that its iron ore mines and pellet plants are working at full capacity as the Rio de Janeiro-based company “struggles” to meet demand for the steelmaking raw material from China.

Meirelles on Feb. 26 said he won’t avoid taking unpopular steps to keep inflation in line with the central bank’s 4.5 percent annual target. His comments came after the bank withdrew some of the stimulus measures adopted during the global credit crisis and raised by 71 billion reais ($39 billion) the amount banks will have to deposit at the central bank.

The benchmark IPCA consumer price index accelerated for the fourth straight month in January, to 4.59 percent, as domestic demand picks up. The IGP-M index, a broader measure of inflation that includes wholesale prices, quickened to 1.18 percent in February, the fastest in 19 months.

A separate report today by the National Industrial Confederation showed manufacturers reduced the use of installed capacity to 81.4 percent in January from a revised 81.5 percent in December.

Analysts had been forecasting installed capacity to rise to 81.7 percent, according to a Bloomberg survey of nine economists.
“There’s no reason, from industry’s point of view, to increase interest rates this year,” said Flavio Castelo Branco, head of economic policy at the industrial confederation. “There’s still some idle capacity that can be used, we don’t see problems supplying domestic demand in 2010.”