Brazil Central Bank Says Inflation Outlook Shows ‘More Favorable’ Signs

Brazil’s central bank sees a “more favorable” outlook for consumer price increases even as its forecast shows inflation converging to target only in 2013.

Brazil’s inflation rate won’t slow to “around” the 4.5 percent target until the first half of 2013, according to both the bank’s reference and market scenario outlined in the minutes of their July 19-20 meeting. Prices will remain above the target this year and next, the minutes said, while “high and growing uncertainties” in the global economy make it harder to identify the persistence of recent price pressures.

Policy makers raised the benchmark interest rate for a fifth straight meeting this month, to 12.50 percent, in a bid to slow price increases running at a six-year high. Inflation, which quickened in the past 10 months, accelerated to 6.71 percent in June.

As in the statement accompanying the bank’s decision, policy makers removed from the minutes language committing themselves to raising rates for a “sufficiently long period.”

“The most important aspect was that the central bank removed a comment indicating a gradual approach,” said Leonardo Sapienza, chief economist for Banco Votorantim SA in Sao Paulo. Sapienza said that the bank left the door open for another rate increase in August. “They see the same risks that they saw before,” he said.

Economists forecast that central bank President Alexandre Tombini will miss the consumer price target next year even if he raises borrowing costs once more in August, according to a central bank survey.
Yields Fall

The yields on interest rate futures contracts maturing in January 2012, the most traded in Sao Paulo, fell one basis point to 12.46 percent at 8:06 a.m. New York time. The real weakened for the second straight day, by 0.24 percent to 1.5593 per U.S. dollar.

President Dilma Rousseff’s administration is relying on a mix of higher borrowing costs, spending cuts and measures to slow credit growth to tame inflation. At the same time, it has been adopting measures to try and weaken its currency that reached a 12-year high this week.

Economists, who expect the central bank to raise the overnight rate by a quarter-point to 12.75 percent next month, forecast consumer prices will rise 6.31 percent this year and 5.28 percent in 2012, according to the median estimate in a central bank survey published July 25.