Brazil Pushes Back Inflation Target to 2012; Cost ‘Too High’ for This Year

Brazil’s central bank said it will seek to bring inflation down to its 4.5 percent target in 2012 as the costs of meeting the goal this year would be “too high.” Interest-rate futures yields for 2011 fell.

The central bank will use monetary policy to “ensure the convergence of inflation to target in 2012,” policy makers said in their quarterly inflation report published today on the bank’s website. “In the current circumstances, good practice recommends that one seeks a smoother convergence of inflation to its target.”

Inflation will slow to 4.4 percent in 2012, down from 5.5 percent in 2011, should policy makers raise the benchmark interest rate to 12.5 percent and the exchange rate remain stable, according to central bank forecasts published today. Policy makers estimate inflation will exceed the 6.5 percent ceiling of the central bank’s inflation target in the third quarter of this year, before slowing.

Traders increased bets the central bank will slow the pace of interest-rate increases in its April meeting, interest-rate futures show. Policy makers raised their benchmark Selic rate 50 basis points at each of their last two meetings, to 11.75 percent. Last year they increased the rate by 200 basis points from a record low 8.75 percent.
Yields Fall

The yield on the interest rate futures contract maturing in January 2012, the most traded in Sao Paulo, fell nine basis points, or 0.09 percentage point, to 12.15 percent at 9:55 a.m. New York time. The real appreciated 0.35 percent to 1.6405 per dollar.

Andre Perfeito, chief economist at Sao Paulo-based Gradual Investimentos, said he cut his interest rate forecast after reading the minutes and now expects the bank to raise to 12 percent at its April policy meeting before pausing. Previously he expected rates to go as high as 12.25 percent this year.

“It’s quite clear that the central bank won’t increase the rate as much as the market believed was necessary,” Perfeito said by telephone from Sao Paulo.

The central bank would have to “sacrifice” economic growth to a large extent to meet the mid-point of the target this year, Jose Francisco de Lima Goncalves, chief economist at Banco Fator SA, said.

The central bank forecasts economic growth will slow to 4 percent in 2011, down from 7.5 percent last year, the inflation report says.
Reserve Requirements

Policy makers said measures to curb credit growth, such as higher reserve and capital requirements implemented in December, have a similar effect on inflation as interest-rate increases and are effective.

Brazil raised a tax on foreign transactions yesterday to reduce loans local banks and companies seek in the foreign market. The measure, which may slow the pace of credit expansion in Brazil by reducing liquidity, is part of President Dilma Rousseff’s effort to contain inflation by relying on tools that replace interest-rate increases.

Annual inflation quickened to 6.13 percent in the 12 months through mid-March, its fastest pace since November 2008. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.

Policy makers today said they are ready to reassess their monetary policy strategy if needed.

Should commodity prices jump again, the central bank signaled it is ready to raise rates more than originally planned, Roberto Padovani, chief economist at Banco WestLB do Brasil SA, said in a phone interview from Sao Paulo. Padovani expects the central bank to raise rates in April to 12.25 percent and then pause.

Monthly inflation as measured by the IGP-M price index slowed to 0.62 percent in March from 1 percent in February, the Getulio Vargas Foundation said. This compares with the median 0.69 percent forecast in a Bloomberg survey of 28 analysts.