UPDATE 3-Brazil c. bank sees high inflation for next 2 years

Thu Mar 28, 2013 1:53pm EDT

* Bank sees inflation at 5.7 pct in 2013, 5.3 pct in 2014

* Sees 25 pct chance of inflation piercing target ceiling

* Sees economy rebounding to expand 3.1 percent in 2013

By Alonso Soto and Asher Levine

BRASILIA, March 28 (Reuters) - Brazil's central bank said on Thursday it expects inflation to remain relatively high in the next two years, raising its forecasts closer to the ceiling of the official target range, but it stopped short of signaling an imminent rate increase.

The bank's quarterly inflation report confirmed market expectations that inflation is quickening despite slower growth in Latin America's largest economy, a political liability for President Dilma Rousseff who must campaign for re-election next year.

Inflation hovering well above the center of the official annual target range of 4.5 percent, plus or minus two percentage points, has raises pressure on Brazilian policymakers to curb price pressures soon.

In recent months, the central bank has flagged it is ready to raise borrowing costs to control prices after an easing cycle that slashed 525 basis points off its benchmark Selic rate in little over a year. However, the market remains confused on when the bank will hike rates.

The bank reiterated in the report that its next monetary policy decision on April 10 would hinge on upcoming economic data, leaving the door open for a rate hike.

Central bank director Carlos Hamilton Araujo reaffirmed the bank's intentions to hike rates by paraphrasing a famous quote by former British Prime Minister Winston Churchill regarding democracy as the least-worst form of government.

"Interest rates is the worst form of remedy to fight inflation except all the others," Hamilton told reporters in a briefing about the report. But he said it was up to the bank's eight-member monetary policy committee to decide whether and when to hike rates.

Inflation in 2013 could climb to 5.7 percent, the bank said, up from a previous estimate of 4.8 percent. It also increased its inflation view for 2014, to 5.3 percent from 4.9 percent.

The central bank said there was a 25 percent possibility that inflation will pierce the target ceiling of 6.5 percent this year, up from a 12 percent chance seen in its last report.

The bank was more optimistic about the economy, forecasting growth of 3.1 percent this year. That level of growth would be above the meager 0.9 percent expansion Brazil posted in 2012 but below the 4 percent projected by the finance ministry.

INFLATION CONTROVERSY

The market is ruling out a rate hike in the first half of the year after Rousseff said on Wednesday that her government did not support policies that tame inflation by lowering economic growth.

The quick market reaction prompted Rousseff to say her comments were "manipulated," and she called on central bank chief Alexandre Tombini to clarify to the media that inflation control remains a top government priority.

Yields on Brazil's interest rate futures contracts fell again on Thursday after the inflation report.

Many investors believe Rousseff's government is pressuring the bank to keep rates at their current record low of 7.25 percent to help support a sluggish economic recovery. To help tame inflation, the government has slashed taxes on food staples, lowered electricity rates and even asked local authorities to delay raising bus fares.

Some analysts said Rousseff's efforts to keep prices down could delay a rate hike despite the higher inflation forecast.

"The (bank's) report reinforced the idea that there is still uncertainty on whether worsening inflation is temporary or permanent," said Flavio Serrano, senior economist with Espirito Santo Investment Bank in Sao Paulo. "Inflation is troubling, we know something needs to be done about it, but how the central bank will act is still unclear."

In the 12 months to mid-March, inflation accelerated to 6.43 percent from 6.18 percent in the year ended one month before.

Tombini has said repeatedly that policymakers are uncomfortable with current levels of inflation, yet a growing chorus of analysts have said the central bank is tolerant of annual inflation at around 5.5 percent.

Tombini's tougher message has not done much to lower the market's inflation expectations by much for this year and next.

Inflation expectations tend to push up real prices as companies raise the value of their products and families stock up on goods to avoid possible price hikes.

Authorities have said easing pressure on commodity prices, lower electricity rates and cheaper food staples will help slow inflation in the second half of the year.

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Comments (1)
KingofPaupers wrote:
Jct: What kind of backward reasoning could conclude that raising merchant’s costs will be passed along to consumers in lower prices?

Mar 29, 2013 6:39pm EDT  --  Report as abuse
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