Brazil Central Bank Signals Pause on Lower 2011 CPI

Brazil’s central bank cut its 2011 inflation forecast to a level closer to its target, signaling the benchmark interest rate may remain unchanged over the next 15 months.

Policy makers cut their 2011 inflation forecast on the so- called reference scenario to 4.6 percent, down from 5 percent in June, according to the central bank’s quarterly inflation report released today on its website. The central bank targets inflation of 4.5 percent.

“The Monetary Policy Committee believes that a convergence of inflation toward the target’s mid-point is tending to materialize,” the central bank said. Economic activity is expanding at a pace more “consistent with long term equilibrium.”

Policy makers kept the benchmark interest rate unchanged at 10.75 percent on Sept. 1 after raising borrowing costs by 200 basis points in its three previous meetings from a record low 8.75 percent. They said slower global economic growth is likely to help contain domestic inflation.

Yields on interest rate future contracts due in January 2012, the most traded in Sao Paulo, fell two basis points to 11.47 percent at 9:45 a.m. New York time.

Rate Increases

Traders are betting the central bank will resume rate increases early next year and push the overnight rate to at least 12.25 percent by the end of 2011 as demand stokes inflation, according to estimates by Bloomberg based on interest rate futures contracts.

Policy makers forecast that in their reference scenario, in which interest rates are kept unchanged at 10.75 percent, inflation will slow to 4.4 percent in the third quarter of 2012.

The inflation report shows the central bank is “comfortable” with keeping rates unchanged until the end of next year, Zeina Latif, senior economist for Latin America at RBS Securities Inc., said in a phone interview from Sao Paulo.

Economists forecast consumer prices will rise 5.05 percent this year and 4.94 percent in 2011, exceeding the government’s target, according to the median forecast in a central bank survey published this week.

Fueled by domestic demand, Latin America’s biggest economy is expected to grow this year at the fastest pace in a quarter of century.

After falling from June to August, food prices are rising in September and pressuring inflation, the bank said. Consumer inflation accelerated to 0.31 percent in the month through mid- September, beating estimates and boosting expectations that the central bank may need to raise rates in the first half of 2011.

Rising Inflation

Annual inflation as measured by the benchmark IPCA-15 price index quickened to 4.57 percent in the 12 months through mid- September from 4.44 percent in mid-August.

Brazil’s broadest measure of inflation rose the fastest since May this month. Construction, consumer and wholesale prices, as measured by the IGP-M index, rose 1.15 percent in September, the Rio de Janeiro-based Getulio Vargas Foundation said yesterday in a report. Economists surveyed by Bloomberg expected 1.12 percent, according to the median forecast from 27 analysts.