Brazil May Lift Rate to Two-Year High as Prices Threaten Target

By Joshua Goodman and Andre Soliani
Sept. 10 (Bloomberg) -- Brazil's central bank probably will raise its interest rate to the highest in two years today, betting that falling commodity prices and slowing economic growth won't be enough to rein in inflation.
Policy makers led by President Henrique Meirelles will lift the overnight rate to 13.75 percent from 13 percent, the fourth increase since April, according to 40 of 41 economists surveyed by Bloomberg. One analyst forecast the bank will raise the so- called Selic rate to 13.5 percent.
While Brazil's fastest economic expansion since 1995 is showing signs of moderating, inflation still threatens to exceed the upper limit of the central bank's target range and policy makers are concerned rising domestic demand and credit growth will further stoke price increases.
``When you look at core inflation, excluding food, the situation remains risky,'' Arthur Carvalho, chief economist for Ativa Corretora in Rio de Janeiro, said in an interview. ``Policy makers are playing tough to make sure the market understands they're serious about bringing down inflation.''
Inflation as measured by the benchmark IPCA index eased to 6.17 percent last month from a three-year high of 6.37 percent in July after food and beverage costs fell for the first time in more than two years. Price increases this year have exceeded the central bank's 4.5 percent target with a leeway of plus or minus 2 percentage points.
World's Highest Rate
Today's increase in the Selic to 13.75 percent would rank Brazil's real interest rate as the highest among 54 countries tracked by Bloomberg. Brazil's real rate, which is the benchmark rate minus inflation, stands at 6.83 percent, the second-highest after Turkey's 7.55 percent.
Policy makers, after raising rates by a more-than-expected 0.75 percentage point on July 23, promised they would act in a ``timely fashion'' to bring inflation back to their target. The central bank also expressed concern that demand growth continues to outpace supply.
The central bank will raise the benchmark rate further to 14.75 percent by year-end, according to a central bank weekly survey.
The rate increases are beginning to cool the economy and a separate report today may show quarterly economic growth eased for a second straight time through June 30.
`Excessive'
Vehicle sales grew 4 percent in August from a year ago, the slowest pace in almost two years, after car loan costs jumped, the industry association said Sept. 4.
Gross domestic product growth in the second quarter may have also slowed to 5.5 percent, from 5.8 percent in the first quarter, according to the median estimate in a Bloomberg survey of 33 economists. The GDP report will be released today at 8 a.m. New York time.
Carlos Thadeu de Freitas, who served as central bank director between 1988 and 1989, said the rate increases may hurt growth unnecessarily. He said ``market paranoia,'' in a country that as recently as 1994 experienced annual inflation of 5,000 percent, was forcing Meirelles' hand.
``To maintain its credibility, the central bank wants to be consistent with its last outlook and give the market what it's looking for,'' said Thadeu de Freitas, now chief economist with Brazil's National Confederation of Commerce. ``This could prove excessive when new credit concessions are already slowing.''
A sharp drop in prices for major commodity exports like soy, beef and orange juice may also be easing pressure on the central bank, said Alfredo Coutino, a Latin America economist at Moody's Economy.com in West Chester, Pennsylvania.
Currency Decline
Since the central bank's last meeting, the Reuters/Jeffries CRB Index of 19 raw materials has fallen 12.7 percent. Commodities make up about two-thirds of Brazil's exports, according to the Brazilian Foreign Trade Association in Rio de Janeiro.
``There's no justification for further tightening when you already have some of the highest rates in the world,'' Coutino said.
Meirelles should follow the lead of Mexican central bank Governor Guillermo Ortiz, Coutino said. After raising the Mexican overnight rate on Aug. 15 to 8.25 percent, Ortiz signaled inflation pressures may be easing, reducing the need for further tightening.
Brazil's real fell to the lowest in seven months yesterday after Finance Minister Guido Mantega said the currency would continue to weaken on reduced foreign investments and a narrowing trade surplus. The benchmark Bovespa stock index dropped to the lowest in a year after commodity prices declined.
Mantega, who criticized central bank rate increases in the past, said this week in Brasilia that economic expansion wasn't stoking inflation, adding supply ``was growing in line with demand.''
One reason for caution is that some industries remain heated. Manufacturers operated at 83.5 percent capacity in July, a record, the National Industrial Confederation said Sept. 3. Industrial output grew 8.5 percent that month, more than economists expected, according to a Sept. 2 government report.