* 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 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
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.
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
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.