Brazil Central Bank Sees Faster Growth and Inflation

Brazil’s economy may expand at the fastest pace in more than two decades in 2010, pushing inflation further above the government’s target this year and next, policy makers said in their quarterly inflation report.

Latin America’s biggest economy may grow 7.3 percent this year, up from a 5.8 percent forecast in the central bank’s March report. Consumer prices will rise 5.4 percent this year, up from 5.2 percent forecast in the March report, according to the bank’s base case scenario. Inflation will slow to 5 percent in 2011, compared with a 4.9 percent forecast in March.

“On the domestic side, the main risk comes from the possibility that inflation and inflation expectations remain above target due to the increased use of productive capacity and expansion of domestic demand,” the bank said.

Brazil’s economy expanded 9 percent in the first quarter, the fastest annual pace in Latin America.

Policy makers raised the benchmark interest rate twice this year to 10.25 percent this month to prevent the economy from “overheating”. The central bank will lift the Selic by 75 basis points for a third time in July, a central bank weekly survey of about 100 economists published this week showed.

“Domestic demand remains the propelling factor in the pace of growth, helping investment recover and confirming the sustainability, in the medium term, of the economy’s expansion,” the bank said today.

The bank said the financial crisis in Europe continues to weigh negatively on the economy, and its outcome uncertain.

Inflation has remained above the government’s target every month this year, decelerating to 5.06 percent in the month through mid-June on lower food and transportation costs. Consumer prices will accelerate 5.55 percent this year, the central bank weekly survey of economists showed this year.

The real strengthened 0.9 percent to 1.7976 per U.S. dollar at 8:11 a.m. New York time from 1.8134 yesterday, the weakest close for the currency since June 9. In the overnight interest- rate future market, the yield on contracts due in January was unchanged at 11.34 percent.