Brazil's Central Bank May Say 2009 Outlook Worsened: Week Ahead

By Joshua Goodman and Andre Soliani
July 28 (Bloomberg) -- Brazil's central bank may say its outlook for 2009 inflation has worsened, stoking speculation policy makers will continue to raise interest rates faster than economists estimated.
The minutes of bank's board July 22-23 meeting, when it decided to raise the benchmark rate by three quarters of a percentage point to 13 percent, will signal what's coming next.
``There's no room to be dovish,'' said Alexandre Lintz, an economist at BNP Paribas in Sao Paulo, who expects three more 0.75-percentage-point increases by year end. ``The bank must show how it plans to confront the serious inflationary risks posed by rising import prices and pressure on salaries.''
Lintz said the minutes, scheduled for release July 31, will show bank officials expect inflation next year to exceed its latest forecast of 4.7 percent made in June 25 quarterly report.
The eight-member board led by central bank President Henrique Meirelles said last week the bigger-than-expected increase will help bring inflation back to the 4.5 percent target in a ``timely fashion'' after it hit a 32-month high of 6.3 percent by mid-July.
The rate increase surprised 31 of 45 economists surveyed by Bloomberg who expected a half-point move as in the two previous meetings. Before that rate decision, economists surveyed by the central bank predicted policy makers would raise rates to 14.25 percent by the end of 2008.
Rising food and energy costs combined with expanding domestic demand have prompted economists to forecast the central bank will miss its inflation target this year for the first time since 2003, according to a central bank survey.
Consumer prices will rise 6.53 percent this year, more than the 4.5 percent goal plus or minus two percentage points, the July 18 survey of about 100 analysts shows.
Wholesale Pressure
Additional pressure is coming from wholesale costs. The IGP- M inflation index, which has a 60 percent weighting on wholesale prices, probably rose 1.78 percent in July, its second fastest in six years, according to the median forecast of 5 economists in a Bloomberg survey. The inflation report will be published July 30.
Inflation concerns are being exacerbated by economic growth that reached 5.8 percent in the first quarter, its fastest January-March expansion since 1995. Unemployment in June fell to 7.8 percent, its second lowest level in more than six years, the national statistics agency said last week.
June's industrial production report, to be published Aug. 1, will provide a gauge of how much swelling incomes and credit are boosting demand for cars, home appliances and electronics in the face of slacking export volumes.
Markets
Last week, the real rose 1.1 percent to 1.5728 per dollar, the biggest gain in five weeks. The yield on the government's zero-coupon bond due January 2010 fell. 0.15 percentage point to 14.81 percent, according to Banco Bradesco SA.
The benchmark Bovespa index fell 4.7 percent to 57199.14 points along the week. Gol - Linhas Aereas Inteligentes SA, Brazil's second-largest airline, rose 16 percent, while steelmaker Usinas Siderurgicas de Minas Gerais SA lost 12 percent.
The following is list of events in Brazil this week:

Event Date
June Current Account and Foreign Investment 7/28
Private Banks Lending, June 7/29
FGV Inflation IGP-M, July 7/30
June Primary Budget Balance 7/30
COPOM Monetary Policy Meeting Minutes 7/31
June Industrial Production 8/1
July Trade Balance 8/1