Brazil May Keep Interest Rate at 11.25% as Inflation Slows

By Andre Soliani
March 5 (Bloomberg) -- Brazil's central bank will probably keep the overnight rate unchanged at a record low for a fourth straight meeting as policy makers bet inflation will slow to target.
All 31 economists surveyed by Bloomberg expect policy makers, led by bank president Henrique Meirelles, to keep the benchmark rate at 11.25 percent. Monthly inflation, as measured by the benchmark IPCA index, slowed in January to 0.54 percent from 0.74 percent a month earlier.
``The bank can wait a bit longer to better assess the situation,'' said Marcelo Salomon, chief economist at Sao Paulo- based Unibanco SA. ``Inflation has cooled in the first two months of the year, easing pressure for a rate increase.''
The central bank in October snapped Brazil's longest cycle of monetary easing since at least 1999 after higher food prices coupled with the fastest economic expansion in more than three years raised concern that inflation would overshoot policy makers' 4.5 inflation target.
Economists such as Robert Padovani at WestLB AG in Sao Paulo say the retreat of monthly inflation in the beginning of this year signals that a surge in prices in December was ``temporary.''
Food, Demand
Annual inflation in Brazil has quickened from an eight-year low of 2.96 percent last March to 4.74 percent through mid- February. Since January, the 12-month inflation rate has persistently exceeded mid-point of the central bank's target of 4.5 percent plus or minus 2 percentage points.
Meat and milk prices were the main driver of inflation in the second half of last year, Padovani, a senior strategist for the German state-owned bank, said. Food prices in 2007 jumped 10.8 percent, the most in five years, fueled by rising worldwide consumer demand for commodities.
Monthly food price inflation decelerated to 1.52 percent in January from a five-year high of 2.06 percent in December.
``When we face an overall quickening of prices, we don't see a sudden reverse,'' Padovani said. He forecast that the central bank will have room to resume rate reductions in the third quarter.
Still, other economists such as Salomon say that inflation rates remain ``uncomfortably'' high to justify a cut, especially in light of strong domestic consumer demand.
Record-low interest rates coupled with record bank lending has stoked a surge in demand for consumer goods such as home appliances and cars in Latin America's No. 1 economy. Retail sales last year jumped 9.6 percent, the biggest gain since the national statistic agency started the current series in 2001.
Global Context
In an expanding economy, it's easier for companies to pass along higher production costs to consumers, which increases the odds that rising prices will spread across the economy, said Salomon, who expects the bank to hold rates through year-end.
While unanimous in forecasting that the central bank will pause, economists are split over the direction of monetary policy in the months ahead, Tony Volpon, chief economist at CM Capital Markets in Sao Paulo, said.
He forecast the bank will raise rates as early as June.
``We are seeing a worldwide inflationary process,'' Volpon says. ``The U.S. clearly made an option for inflation and that will affect everyone.''
The Federal Reserve has cut the U.S. benchmark interest rate by 2.25 percentage points since September, to 3 percent. Fed Chairman Ben Bernanke last week indicated policy makers are ready to lower interest rates further to revive the world's biggest economy as banks make it tougher to borrow.
Salomon says the Brazilian central bank's ability to further cut interest rates, the highest in the region, will hinge on the international circumstances.