Brazil May Lift Interest Rates as Inflation Rises: Week Ahead

By Andre Soliani
July 21 (Bloomberg) -- Brazil's central bank will probably raise the benchmark interest rate for a third consecutive meeting this week as inflation edges closer to the upper end of the official target range.
Policy makers led by president Henrique Meirelles will increase the rate to 12.75 percent from 12.25 percent, according to 19 of 23 economists surveyed by Bloomberg. Three analysts forecast the central bank would quicken the pace of increases and put the Selic rate at 13 percent. One expects no rate change.
``We don't see any good news on the inflation front,'' Sergio Vale, chief economist at Sao Paulo-based MB Associados, said in a telephone interview. ``We expect the bank to increase the interest rate in all four meetings until the end of the year.''
Monthly consumer prices as measured by the benchmark IPCA-15 index may have risen 0.68 percent through mid-July, almost three times the rate as a year ago, according to the median estimate of 21 economists. That would push the annual inflation rate to 6.38 percent, a Bloomberg survey of four analysts shows. The government will report mid-July inflation July 24.
Consumer prices rose 6.06 percent in the 12 months through June, the fastest pace in 31 months, because of rising food costs and growing domestic demand. Inflation will accelerate to 6.48 percent by year-end, a July 11 central bank survey shows. Brazil's central bank targets inflation of 4.5 percent plus or minus two percentage points.
The bank started to tighten rates at the April 15-16 meeting after holding policy unchanged for six months. Since adopting inflation targeting in 1999, policy makers missed the target three times, in 2001, 2002 and 2003.
Quicker Pace
Meirelles told senators in Brasilia on July 15 the bank will act ``vigorously'' to ensure next year's inflation will be in line with the 4.5 percent midpoint of the target.
Alexandre Lintz, an economist at BNP Paribas in Sao Paulo, expects the central bank will increase the interest rate by three-quarters of a percentage point to 13 percent next week given inflation is quickening and there are no signs demand is slowing.
Brazil's economy created a record 309,442 government- registered jobs in June as higher domestic demand coupled with rising commodity prices prompted companies to add staff and step up production, a July 17 Labor Ministry report showed.
``The central bank needs to carefully manage the deceleration of domestic demand to ensure it won't outpace supply,'' Lintz said.
Latin America's biggest economy grew 5.8 percent in the first quarter after expanding 6.2 percent in the fourth, the fastest in 3 1/2 years. Retail sales in May jumped 10.5 percent from a year ago, up from 8.7 percent in April, the national statistic agency said July 15. Sales climbed more than 10 percent in four of the six first months of this year.
Markets
Last week, the real gained 0.7 percent to 1.5893 per dollar, from 1.601 the previous week. The yield on the government's zero- coupon bond due January 2010 fell 0.2 percentage point to 14.96 percent, according to Banco Bradesco SA.
The benchmark Bovespa index fell 0.3 percent to 59988.1 points along the week. Tam SA, the country's biggest airline, rose 16 percent, while Cia. Vale do Rio Doce was the biggest decliner with an 8.3 percent loss.
The following is list of events in Brazil this week:
Event Date Interest Rate Decision 7/23 IBGE Inflation IPCA-15 7/24 IBGE Unemployment Rate 7/24