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UPDATE 2-Brazil cbank raises inflation view, signals end to rate cuts

by on September 27, 2012 3:14 pm GMT
 

Thu Sep 27, 2012 11:14am EDT

* Bank hikes 2012 inflation forecast to 5.2 pct from 4.7 pct

* Also cuts 2012 GDP forecast to 1.6 pct from 2.5 pct

* Strikes more cautious tone on short-term inflation

* Revision of inflation view could spell end of easing cycle

By Alonso Soto and Silvio Cascione

BRASILIA, Sept 27 (Reuters) – The Brazilian central bank
raised its inflation forecast for 2012, reinforcing arguments
that policymakers likely ended their aggressive rate-cutting
campaign even as the world’s No. 6 economy remains on shaky
ground.

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

The bank also cut its 2012 economic growth estimate to 1.6
percent from 2.5 percent, its second straight downward revision,
showing that policymakers underestimated the intensity of the
slowdown.

After nearly two years in office, President Dilma Rousseff
is not only struggling to restore the growth rates that made
Brazil a star among emerging economies, but also faces growing
inflationary pressures from a flurry of rate cuts.

For 2013, the central bank lowered its inflation estimate
to 4.9 percent from 5.0 percent, 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 time.

However, both inflation estimates remain above the center of
the official target range of 4.5 percent – plus or minus two
percentage points.

“The bottom line is that the central bank recognizes that
its policy is not helping inflation converge toward the center
of the official target and that makes it more likely that the
(benchmark) Selic will remain where it is now,” said Mauricio
Rosal, economist with Raymond James in Sao Paulo.

Heeding Rousseff’s calls for lower rates, the central bank
has trimmed 500 basis points off its benchmark Selic interest
rate in a year to bolster an economy that has been practically
stagnant since mid-2011.

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

The pick-up in consumer prices could spell the end of the
central bank’s year-long easing cycle by maintaining the Selic
at its record-low of 7.5 percent at its next meeting on Oct. 10.

The bank’s cautionary tone on inflation in the report turned
investors’ bets in favor of a pause in monetary easing cycle.
Trading in Brazil’s interest rate futures on Thursday
implied a 53 percent probability that the bank will leave rates
unchanged at the bank’s next meeting, according to Thomson
Reuters calculations. Earlier in the day the balance
was tilted in favor of a 25-basis-points cut.

Most analysts also agree that the central bank will keep
rates steady.

In the report, the central bank acknowledged that 12-month
inflation’s path toward the center of the official target was
not linear.

The bank also flagged risks to short-term inflation, saying
it “contemplates relatively benign dynamics for food prices in
the medium term, although price volatility of raw products and
grain constitutes a risk factor.”

For more than two months, the annual inflation rate has
moved upward. 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.

Some analysts have questioned the central bank’s commitment
to keep inflation at the center of the target, arguing that the
bank is pursuing higher growth instead of price stability.

Still, Fitch Ratings, which cut its estimate for Brazil’s
2012 growth to 1.5 percent, raised doubts about the magnitude of
an expected economic rebound next year.

The agency now expects the economy to grow 4.2 percent in
2013, but said its forecast is uncertain “given the
international financial volatility and the pace at which the
Brazilian economy responds to monetary and fiscal stimuli.”

RECORD LOWS FOR SOME TIME?

Central bank chief Alexandre Tombini has repeated over the
last few weeks that prices remain under control and that
inflation should continues its downward trajectory toward the
center of the target.

Looking ahead, government officials are giving conflicting
signals over the direction of monetary policy next year.

Although Tombini has signaled that the bank is ready to keep
rates at record lows for some time, he has not ruled out future
hikes to keep inflation in check.

Finance Minister Guido Mantega has insisted there is no need
for the bank to raise rates in 2013 as inflation should remain
under control thanks to government measures to lower energy
costs for companies and consumers.

The exchange highlights the pressure the central bank
faces under the Rousseff administration to keep the Selic at the
current record lows for a prolonged period.