UPDATE 2-Brazil ups 2007 GDP forecast, says inflation tame

(Adds 2006 GDP revision, economist comment)

By Elzio Barreto

SAO PAULO, March 28 (Reuters) - Brazil's central bank raised on Wednesday its economic growth forecast for 2007 and cut the outlook for inflation, saying that on current evidence the pickup in economic activity would not stoke consumer prices.

The bank said in its quarterly inflation report that the economy should expand 4.1 percent, compared with a 3.8 percent forecast made in December.

It also cut the forecast for the benchmark IPCA inflation index to 3.8 percent from 3.9 percent, saying that a benign outlook for consumer prices "has materialized" and will continue for the coming quarters. For 2008, the central bank trimmed its inflation forecast to 4.4 percent from 4.5 percent.

Brazil has a 4.5 percent inflation target for 2007 and 2008.

While the central bank said it sees no indication that a rebound in the economy would stoke inflation, it said it would monitor the outcome of recent rate cuts in the economy and the effects on consumer prices.

It also said gains in wholesale agriculture prices as well as increased government spending this year may drive the inflation rate higher.

"There was a very important revision for the 2007 GDP, which supports their argument that this acceleration will impact inflation," said Tatiana Pinheiro, an economist with ABN Amro's Brazilian unit. "Inflation is under control, but it will be a bit above the level we saw at the end of last year and at the beginning of 2007."

Earlier this month the central bank cut its benchmark Selic lending rate for the 14th time in a row, to an all-time low of 12.75 percent from 13 percent.

The bank's monetary policy committee, known as Copom, extended an 18-month monetary easing cycle, though the reduction was smaller than rate cuts made last year.

The bank trimmed the Selic by a half percentage point or more eight times in 2006.

GDP REVISIONS

The central bank's revised GDP forecast does not take into account a new methodology for calculating economic growth recently adopted by the government's statistics agency.

The agency, known as IBGE, said last week the country's economy, Latin America's largest, grew more than previously estimated between 2002 and 2005 under a new calculation that adds in more segments of the economy.

The revised figures put the 2005 expansion at 2.9 percent, higher than the 2.3 percent growth under the old methodology.

Using the new methodology, the IBGE revised on Wednesday its economic growth estimate for 2006 to 3.7 percent from a previously reported 2.9 percent.

The IBGE said Brazil's economy grew to 2.3 trillion reais ($1.11 trillion) in 2006, boosted by a 4.1 percent expansion in agriculture, 4.6 percent in construction and 4.8 percent growth in the retail sector on the economy.

The revised data takes into consideration 56 segments of the economy and 110 products, up from 43 segments and 80 products before. ($1 = 2.07 reais) (Additional reporting by Todd Benson and Rodrigo Gaier)