UPDATE 2-Brazil retail sales rise more than expected in May

* Brazil retail sales up 0.6 pct in May from April

* Credit-related segments help spur gains in sales

* Data suggests limited signs of growth moderation
(Recasts, adds comments, yields, background on activity)

SAO PAULO, July 12 (Reuters) - Brazilian retail sales rose
more than expected in May, signaling that a gradual economic
slowdown and higher borrowing costs are doing little to cool
consumer spending.

Retail sales volumes in Brazil climbed 0.6 percent in May
from April BRRSL=ECI, the second rise in three months,
statistics agency IBGE said on Tuesday. A broader gauge of
sales including vehicles, auto parts and construction materials
gained 1 percent from April, the third straight gain.

The retail data reinforced concerns that the economy is
still running too hot to keep a surge in consumer prices at
bay. The central bank could be forced to hike interest rates
next week to help cool growth and lower a mismatch between
supply and demand that is fanning inflation.

"In all, retail sales looks softer into the second quarter,
but the moderation has been very gradual," said Italo Lombardi,
a senior Latin American economist with BNP Paribas in New
York.

After a robust start to the year, the gradual soft-landing
signs look more consistent with policy tightening efforts. Yet,
the success of such policies hinges more on the accommodation
of red-hot labor and credit markets -- which the central bank
also singled out as potential drivers for future inflation.

Consumer credit has soared over the past three years,
driven by demand for auto and paycheck-deductible loans.
Outstanding loans have doubled to about half of Brazil's gross
domestic product since 2003, according to central bank data.

To pare that frenzy in credit markets, central bank
policymakers have lifted rates four times this year by a
cumulative 150 basis points, and analysts expect at least one
more rate hike, this month, from the current 12.25 percent.

Economists on Monday raised their forecast for inflation
for this year and next, suggesting that efforts to rein in
strong consumer demand and price increases are taking longer
than expected to bear fruit, according to a central bank weekly
survey. For more see [ID:nN1E76A037].

Investors are betting inflation will break above the top
end of the government's target for this year of 4.5 percent
plus or minus 2 percentage points for the first time in nine
years.

The benchmark IPCA consumer price index [BRCPI=ECI] has
breached the target range for the past three months. In the 12
months through June, the index reached 6.71 percent.

Yields on interest rate futures contracts were mixed after
the data release. The yield on the Jan. 2012 contract DIJF2
was stable at 12.50 percent, while that for the contract
maturing in Jan. 2013 DIJF3 ticked lower to 12.69 percent
from 12.71 percent on Monday.

CREDIT BOOM FUELING SALES

Ample credit and rising household incomes have fueled a
rise in spending over the past two years. Brazil's unemployment
rate is near record lows and is expected to tighten further,
the government said recently.

In fact, credit-related segments presented the biggest
increases in May from the prior month, indicating that
Brazilians are ignoring higher interest rates and taking on
loans for their purchases.

Sales of office and telecommunications equipment surged
11.6 percent from April, leading retail sales higher, IBGE
said. Apparel sales rose 2.5 percent on a month-on-month basis,
while sales of pharmaceutical and beauty care products gained
1.9 percent.

May's retail sales climbed 6.2 percent from the
year-earlier period BRRSLY=ECI, the IBGE added, more than the
5.8 percent median estimate in the Reuters poll. Forecasts for
the year-on-year increase ranged from 3.7 to 8 percent.

The IBGE said nominal sales, as measured by total receipts
and unadjusted for inflation, rose 0.8 percent in May from the
previous month and jumped 10.7 percent from a year earlier.

Retail sales volumes, unlike total receipts via cash or
credit cards, exclude inflation, which could distort
comparisons.

The indicator had been expected to rise 0.5 percent,
according to the median estimate of 19 economists polled by
Reuters. Forecasts ranged from a dip of 0.6 percent to an
advance of 1.1 percent.

For the IBGE's retail sales report see:
here
(Reporting by Rodrigo Viga Gaier and Jeb Blount; Writing by
Luciana Lopez and Guillermo Parra-Bernal; Editing by Andrew
Hay)