Bloomberg News

Brazil Economists Raise 2012 Inflation Forecast for 7th Week

October 17, 2011

(Updates with analyst forecast in third paragraph.)

Oct. 17 (Bloomberg) -- Economists covering Brazil raised their 2012 inflation forecast for a seventh week as a tight labor market, predictions of further interest rate cuts and an improved outlook for a global recovery stoked expectations of faster price rises.

Consumer prices will increase 5.61 percent next year, according to the median forecast in an Oct. 14 central bank survey of about 100 economists published today, up from a forecast of 5.59 percent the previous week. Economists also raised their 2013 inflation forecast to 4.9 percent from 4.85 percent.

“Inflation dynamics are getting worse,” said Flavio Serrano, senior economist at Espirito Santo Investment Bank in Sao Paulo. “The labor market has been driving this situation. We see the unemployment rate below its natural level and, despite that, the central bank is cutting interest rates.”

An improved international scenario over the last two weeks has also worsened the inflation outlook, Serrano said.

The economists surveyed expect the central bank to cut borrowing costs half a point to 11.5 percent at their policy meeting this week, the survey found, after central bank President Alexandre Tombini said that “moderate” rate cuts could protect Brazil from global turbulence. August retail sales and economic activity figures data published last week showed the economy slowing faster than economists had expected.

Interest Rate Futures

The yield on the interest rate futures contract maturing in January 2013, the most traded in Sao Paulo today, fell 3 basis points, or 0.02 percentage point, to 10.52 percent at 8:01 a.m. New York time. The real weakened 0.6 percent to 1.7435 per dollar.

Consumer prices, as measured by the IPCA index, will rise 6.52 percent this year, unchanged from last week’s forecast, the survey found.

Latin America’s biggest economy will grow 3.42 percent this year, down from a forecast of 3.50 percent the previous week, the survey found. Analysts also cut their 2012 growth forecast to 3.6 percent from 3.7 percent.

Tombini surprised analysts Aug. 31 by slashing the benchmark Selic rate 50 basis points to 12 percent, citing a “substantial deterioration” in the global outlook. Analysts expect policy makers to cut the Selic to 11 percent by the end of the year, and to 10.5 percent by the end of 2012, the survey found.

Inflation accelerated for a 13th straight month in September, to 7.31 percent. The central bank targets inflation of 4.5 percent, plus or minus two percentage points.

Unemployment fell to 6 percent in August, a record low for the month, down from 6.7 percent a year earlier.

The economic activity index, a proxy for gross domestic product, contracted 0.53 percent in August from the previous month, its biggest monthly fall since the global financial crisis of 2008. August retail sales fell the most since March 2009.

--Editors: Bill Faries, Richard Jarvie

To contact the reporter on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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