Brazil Economists Raise Inflation Forecast, Reduce GDP Estimate in Survey

Economists covering the Brazilian economy cut their growth forecast for next year for the first time in 12 months on bets that policy makers will need to slow the economy to cool inflation running at a 26-month high.

Brazil’s gross domestic product will expand 4.45 percent next year, down from a week-earlier forecast of 4.5 percent, according to the median forecast in a March 11 central bank survey of about 100 economists published today. The economists also cut their 2011 GDP growth forecast for a third straight week, to 4.1 percent from 4.29 percent the previous week, the survey found.

Consumer prices will rise 5.82 percent this year, compared with a week-earlier forecast of 5.78 percent. Inflation expectations for 2012 were unchanged at 4.80 percent. The central bank targets inflation of 4.5 percent plus or minus two percentage points.

“Inflation is too high,” said Gustavo Rangel, chief Brazil economist for ING Financial Markets in New York. “The government will have to slow down the economy materially to bring it back to the target.”

Traders are reducing bets on interest rate increases after the central bank signaled it may resort to additional “macro- prudential” measures to curb credit growth. The yield on the interest rate futures contract maturing in 2012 fell three basis points, or 0.03 percentage point, to 12.32 percent at 8:34 a.m. New York time. The yield fell 22 basis points last week.

Higher Rate
The central bank will increase the benchmark interest rate 50 basis points to 12.25 percent at its April 19-20 policy meeting, the survey found, unchanged from last week. The pace of rate rises this year will depend on whether the bank announces further credit curbs, Rangel said. At their March meeting, policy makers raised the rate 50 basis points for a second straight meeting.

The central bank said credit curbs are a “rapid and potent” method to contain demand, according to minutes of its March 1-2 policy meeting, published March 10. The bank raised reserve and capital requirements in December to prevent a credit bubble. Economists estimate the higher reserve requirements will have the same impact on inflation as a 75 basis-point increase in the benchmark rate, according to a central bank survey released Feb. 24.

Annual inflation quickened to 6.01 percent in February, the fastest pace since November 2008. Inflation will start slowing from the fourth quarter of this year, and will be “slightly” below the target by the end of next year, the bank said in the minutes.