UPDATE 1-Brazil central bank ups 2012 inflation view, cuts 2013

by on September 27, 2012 12:27 pm BST

Thu Sep 27, 2012 8:27am EDT

* Bank also chops 2012 GDP forecast to 1.6 pct from 2.5 pct

* Bank strikes more cautious tone on short-term inflation

* Revision of inflation view could spell end of easing cycle

BRASILIA, Sept 27 (Reuters) – The Brazilian central bank
raised its inflation forecast for 2012, reinforcing arguments
that policymakers would likely end their year-long monetary
easing cycle and hold the benchmark interest rate steady in
October as price pressures fail to subside.

In its latest quarterly inflation report, released on
Thursday, the bank raised its 2012 inflation forecast to 5.2
percent from 4.7 percent seen three months ago.

But it lowered its estimate for 2013 inflation to 4.9
percent from 5.0 percent previously, citing lower energy costs
after the government announced plans to slash electricity rates.
With some price pressures contained next year, the report
signaled interest rates could stay near record lows for some

Its projection for economic growth for 2012 was revised
sharply down to 1.6 percent from 2.5 percent, its second
straight downward revision in what shows that policymakers
overestimated the pace of recovery in the world’s No. 6 economy.

For more than a year the government of President Dilma
Rousseff has struggled to revive a sluggish economy. The central
bank has slashed 500 basis points off its benchmark Selic
interest rate, and the government delivered a flurry of tax
breaks and subsidized credit.

All that stimulus is starting to support the economy, but
may also stoke inflation that has accelerated on the back of a
surge in global and domestic food prices.

The central bank said it “contemplates relatively benign
dynamics for food prices in the medium term, although price
volatility of raw products and grain constitutes a risk factor”

The recent pick up in consumer prices could spell the end of
the central bank aggressive rate-cutting cycle at its next
meeting on Oct. 10. The Selic rate stands at a record low of 7.5

For more than two months now the annual inflation rate has
moved upwards and further away from the center of the official
target range of 4.5 percent — plus or minus two percentage
points. A rise in food prices pushed inflation up to 5.24
percent in August, reverting a downward trend that took
inflation to a near two-year low of 4.92 percent in June.