September 29, 2011 / 12:15 PM / 8 years ago

UPDATE 2-Brazil's central bank hints at mild rate cuts ahead

 * Brazil central bank sees 2011 inflation at 6.4 percent
 * Sees 2012 inflation at 4.7 percent vs 4.8 percent before
 * Central bank forecasts 2011 GDP growth at 3.5 percent
 (Recasts, writes through)
 By Luciana Lopez and Vanessa Stelzer
 SAO PAULO, Sept 29 (Reuters) - Brazil's central bank
suggested interest rates could be cut more moderately than
markets expect as it stressed the risk of a global economic
slowdown, even as Brazilian inflation remains high.
 The bank, which surprised markets with a 50-basis-point
cut in its key rate to 12 percent last month, said "moderate
adjustments" were consistent with bringing inflation back
toward the 4.5 percent center of its target range in 2012.
 In a quarterly inflation report released on Thursday, it
raised its forecast for inflation for this year to 6.4 percent
from 5.8 percent, even as it cut its growth expectation for
Latin America's largest economy to 3.5 percent from 4 percent.
 The higher inflation forecast is almost a full percentage
point lower than the current annual rate of 7.33 percent.
 But the revision underlines how price pressures remain a
barrier to the government's desire to lower interest rates
that are among the world's highest.
 Yields on interest-rate futures contracts <0#DIJ:> rose on
Thursday as investors, while still seeing rate cuts ahead,
pared their bets for the size of those decreases.
 Brazil inflation graphic:
 Brazil interest rates graphic:
 PDF on Brazil's economy:
 The yield on the contract due January 2013 DIJF3, among
the most highly traded early in the session, rose as high as
10.54 percent from 10.41 percent in the previous session.
 Central Bank Governor Alexandre "Tombini and the central
bank are signalling that they are not going to make drastic
cuts in rates," said Flavio Serrano, an economist with BES
Investimentos in Sao Paulo.
 "Rates are adjusting to an outlook of 50-basis-points cuts
rather than the 75-basis-points or 1-percentage-point cuts the
market was starting to price in."
 Policy-makers had justified last month's cut by pointing
to the darkening outlook for global growth.
 On Thursday, the central bank said it saw a "substantial
slowdown" in global economic activity with a "higher risk of
recession in mature economies, and relatively benign commodity
  While the central bank raised its inflation view for this
year, it lowered the 2012 forecast to 4.7 percent from 4.8
percent, underscoring its expectation that struggling
developed economies will result in lower inflation pressures.
 In the minutes from last month's policy meeting, the
monetary policy committee, known as Copom, pointed the finger
of blame for slower growth at the euro zone's sovereign debt
crisis and a sluggish U.S. economy.
 The central bank's interest-rate cut last month prompted
worries among some economists, who saw the move as risky,
given inflation above target since April. The central bank
this year is targeting inflation of 4.5 percent, plus or minus
2 percentage points.
 Other major economies in Latin America have yet to follow
Brazil's example in lowering rates, pausing rate hikes but not
yet cutting.
 President Dilma Rousseff has often repeated her desire for
borrowing costs to be more in line with those of global peers
but the brisk inflation makes that tricky.
 Getting those price pressures down is another political
priority for Rousseff, who inherited inflation at a six-year
high when she took office in January. Inflation worries have
threatened to overshadow her first year in office, becoming a
focal point for discussion even as long-term reforms
potentially stall.
 Nor are Brazilians -- including the lower-income voters
who make up Rousseff's power base -- particularly forgiving
when it comes to inflation. With long memories of runaway
prices in decades past, voters will almost certainly punish
any politician who doesn't keep a tight rein on prices.
 Rousseff has promised to cut about $30 billion from the
budget this year to try to shift some of the burden for
cooling the economy onto fiscal policy from monetary policy,
but analysts say rates remain a key inflation-control tool.
 Link to report:
 (Reporting by Sao Paulo newsroom and Jeb Blount in Rio de
Janeiro; Writing by Luciana Lopez; Editing by Stuart Grudgings
and Jan Paschal)

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