Brazil's Central Bank Says Crisis May Slow Inflation (Update2)

By Joshua Goodman and Carlos Caminada
Nov. 6 (Bloomberg) -- Brazil's central bank said the global credit crisis may slow demand and help ease inflation, suggesting policy makers will hold interest rates in the months ahead after deciding last week to break from six months of increases.
``The consolidation of more restrictive financial conditions may magnify the effect of monetary policy on demand, and over time, on inflation,'' the bank said, according to the minutes of an Oct. 28-29 meeting released today on its Web site.
The eight-member board led by President Henrique Meirelles cited an environment of heightened uncertainty in their unanimous decision to leave ``for the moment'' the so-called Selic rate unchanged at 13.75 percent.
Policy makers will probably hold rates as they wait to see how much the freeze in credit markets will crimp lending and investment in Latin America's largest economy, slow commodities demand and weaken the local currency, economists said.
``They can't close the door on another interest rate hike, but are signaling that they may pause for several months,'' said Roberto Padovani, chief economist at WestLB do Brasil in Sao Paulo. ``The overall balance of risks remains uncertain.''
Inflation, which the bank describes as ``relatively widespread,'' accelerated last month to 6.4 percent from 6.25 percent in September, according to the median estimate in a Bloomberg survey of 19 economists.
`More Uncertain'
The statistics agency will release October inflation data tomorrow. The annual rate has been above the central bank's 4.5 percent target since January.
The worsening global economic outlook since the bank's last meeting may help contain inflation.
The central bank said the outlook for demand and investment was becoming ``more uncertain'' and that they may ``adjust interest rates, although not necessarily in a continuous manner'' in response to the shifting inflationary risks.
Brazil's economy will grow 3 percent next year, compared with an estimated 5.23 percent expansion this year, according to the most recent central bank survey of economists published Nov. 3. The same survey shows inflation ending the year at 6.31 percent, up from 6.14 percent a month earlier.
Finance Minister Guido Mantega, speaking in an event in Brasilia, said the economy may still grow 4 percent next year as government measures including emergency loans for companies will help the nation weather the credit crunch and prevent output and consumption from stalling. He urged Brazilian consumers to keep spending.
``The worst is over,'' Mantega said.
President Luiz Inacio Lula da Silva said analysts that are slashing their 2009 growth forecasts may ``fall flat on their faces.''
More Loans
Central bankers have injected more than 100 billion reais of cash into the banking system since Sept. 24 to spur lending and prevent smaller institutions from going under. Last week, the Federal Reserve agreed to provide Brazil, Mexico, Singapore and South Korea $30 billion each to support currencies in developing nations.
Mantega said today government-controlled Banco do Brasil SA will provide 4 billion reais of loans to carmakers' financial arms to help sustain sales while the National Bank for Economic and Social Development, or Bndes, will have an additional 10 billion reais to finance companies. Banco do Brasil will also receive 5 billion reais from a workers' assistance fund known as FAT to lend to small companies hurt by the credit squeeze, he said.
The real fell 3.8 percent to 2.2135 per dollar at 1:24 p.m. New York time from 2.1295 late yesterday.