Meirelles May Raise Brazil Rate as Economy, Prices Accelerate

By Andre Soliani
April 16 (Bloomberg) -- Brazil's economic growth, second- weakest in the continent since 2003, is picking up and will probably force central bank President Henrique Meirelles to reverse course and raise interest rates.
Economists covering Brazil's $1.3 trillion economy expect the central bank to change tack after 18 interest rate cuts and raise the lending rate today for the first time in three years. The bank will raise its rate a quarter point to 11.50 percent, according to 27 of 37 economists surveyed by Bloomberg.
Latin America's biggest economy grew 6.2 percent in the last quarter of 2007, more than twice the pace of the last decade. Commodity exports and bank lending, which has almost doubled in the past three years and is fueling purchases of cars and other big-ticket items, is powering economic growth.
``When it comes to inflation, it's always best to try and prevent it, than have to try and cure it,'' Marcilio Marques Moreira, 76, a former economy minister, said in a telephone interview from Rio de Janeiro.
Brazil's bank will announce its rate decision after 6 p.m. (5 p.m. New York time). Eight analysts of the 37 analysts expect a half point increase, while two expect the bank to leave the rate unchanged.
Quickening Inflation
Brazil's economy expanded an average of 3.8 percent from 2003 to 2007, the second slowest in South America. Argentina led the region with 8.8 percent, followed by Venezuela with 7.9 percent and Uruguay with 6.9 percent, according to International Monetary Fund data. Guyana trailed the region with 1.9 percent.
A surge in food prices coupled with rising consumer demand have pushed annual inflation in Brazil from an eight-year low of 3 percent in March 2007 to a two-year high of 4.73 percent in March, above policy makers' year-end target for a third month.
Lending by banks has climbed at least 20 percent in each of the past three years.
``There is no more doubt that the economy is heating up,'' Mario Mesquita, the central bank's economic policy director, told reporters March 27 in Brasilia. ``There is a mismatch between supply and demand.''
The central bank on March 27 forecast 2008 inflation at 4.6 percent, above its 4.5 percent target, which grants policy makers leeway of plus or minus 2 percentage points. The bank in December forecast a 4.3 percent rise in consumer prices in 2008.
``Inflation doesn't mix well with economic growth, especially when one tries for sustained economic growth,'' said Moreira, a Brazilian cabinet minister in 1991 and 1992.
Raising Rates
Policy makers will raise the so-called Selic target rate 1.50 percentage points to 12.75 percent by year-end, according to an April 11 central bank survey.
The bank in October held the benchmark rate at 11.25 percent, ending the longest monetary easing cycle since Brazil adopted inflation targets in 1999. Policy makers have since then kept the rate unchanged at four meetings.
``A rate increase at the next meeting seems almost certain,'' said Roberto Padovani, a senior strategist at WestLB AG in Sao Paulo. ``The move will show Brazil's commitment to inflation control.''
Brazilian President Luiz Inacio Lula da Silva and his predecessor, Fernando Henrique Cardoso, bolstered investor confidence in the country by underscoring the government's commitment to battling inflation.
Annual inflation, as measured by the benchmark IPCA index, reached 2,477 percent in 1993. The index, which averaged 400 percent a year between 1980 and 2007, fell below 10 percent for the first time in 1996.
5-Percent Goal
Since the central bank's March 4-5 meeting, traders have increased their bets that the bank will raise rates.
The yield on the overnight interest-rate future contract for January 2009 delivery climbed to 12.48 percent yesterday from 11.717 percent on March 5. That's more than 1 percentage point above the bank's benchmark rate.
Following his re-election in 2006, Lula, 61, set a goal of 5 percent economic growth for 2008 through 2010, up from a 3.5 percent average during his first term.
Some economists and members of Lula's policy team, including Luiz Gonzaga Belluzzo, a former economic policy secretary for the finance ministry, are urging the central bank to hold off raising rates as long as possible.
Higher interest rates would attract increased inflows, driving up the value of the Brazilian real and making exporters' goods less competitive.
``I hope policy makers abstain from a rate increase, which could fuel a crisis in our external sector,'' Belluzzo said in an interview.
Under Lula, Brazil has become the world's 10th-biggest economy, up from 14th biggest when he took office in 2003, according to International Monetary Fund data.
Faster economic growth has helped Lula achieve record high approval ratings. Voters who consider Lula's administration at least good rose to 58 percent from 51 percent in December, according to Sao Paulo-based pollster Ibope.