Aug. 26 (Bloomberg) -- Brazil's central bank signaled it may raise its benchmark lending rate for the first time in more than 18 months, saying a surge in oil prices and quickening economic expansion might warrant a ``more active'' policy to slow inflation.

Central bankers, in minutes from last week's policy meeting, said they're concerned that leaving the overnight rate at 16 percent won't be enough to bring inflation down to government-set targets of 5.5 percent for 2004 and 4.5 percent for 2005. The bank has kept the benchmark rate at a three-year low since April after 11 months of rate reductions sparked the fastest expansion in four years.

``The strong growth in economic activity, which has already reached historically high levels and which keeps showing signs of strength, requires the bank to use extreme caution,'' policy makers said in the minutes. They voted unanimously at last week's meeting to leave the rate at 16 percent.

Yields on interest-rate futures soared today as traders bet that the central bank may raise the benchmark rate before yearend. The yield on the overnight rate contract for Jan. 5, 2005 settlement rose 14 basis points, or 0.14 percentage point, to 16.62 percent on Sao Paulo's Commodities and Futures Exchange at 10:09 a.m. New York time.

``The way things are going, they will have to raise rates temporarily to crimp inflationary expectations,'' Nuno Camara, a Latin America economist with Dresdner Kleinwort Wasserstein, said in a telephone interview from Sao Paulo. ``Unless they act to reduce those expectations, the strong growth and the external scenario will keep adding pressure on prices.''

Oil

Camara forecasts the central bank will raise the overnight rate a quarter-point to 16.25 percent as soon as October.

Central bankers said that the increase in oil prices and the jump in 2005 inflation expectations have heightened a concern they had stated in previous policy meetings that controlling inflation ``would demand a more active stance on monetary policy.''

International crude oil prices surged to a record high of $49.40 a barrel on Friday. Sergio Gabrielli, chief financial officer at Brazil's state-controlled oil company, has said the company may authorize the second increase in domestic prices since June. While crude prices have fallen from Friday to $42.91 a barrel in New York, the price remains above the Brazilian central bank's forecast for $35 a barrel this year.

Economists in a central bank weekly survey expect inflation next year of 5.5 percent, 1 percentage point above the government's target. Inflation was 6.8 percent in the 12 months through July.

Capacity Utilization

The central bank said in the minutes that the expansion has led companies to boost their installed capacity usage to near record highs that were established in 1995.

The economic expansion is so strong that an increase in interest rates wouldn't weaken it, the bank said. ``Indicators of production, sales and employment attest to the fact that the pickup in economic activity is proceeding at a vigorous pace,'' the bank said.

Brazil's jobless rate fell to a seven-month low of 11.2 percent in July, a government report showed today. Reports earlier this month showed that industrial output surged 13 percent in June, the biggest increase in four years, while retail sales jumped 12.8 percent, the biggest rise in three years.

Policy makers said that they raised their 2004 and 2005 inflation forecasts since the previous policy meeting, held on July 21. They said both forecasts are above the government-set inflation targets for 2004 and 2005. They didn't say what the new forecasts are.

Core Inflation

The bank also said that core inflation -- which excludes prices subject to the biggest swings, such as food -- ``remains at levels incompatible with the inflation targets.''

Eighteen of the 27 economists surveyed by Bloomberg News before last week's policy meeting said they thought it was more likely the central bank's next move would be a rate reduction rather than an increase.

Some economists, such as Alexandre Lintz at BNP Paribas in Sao Paulo, said today they still believe a rate reduction is more likely because they expect inflation will slow and the central bank will seek to make the expansion sustainable.

``An interest-rate rise is not our main scenario,'' Lintz said in a telephone interview. ``Demand is rising sharply, but supply is also rising sharply. Investments are coming in strong, business leaders are confident.''

Lintz said he expects the bank to lower the benchmark rate a quarter-point to 15.75 percent by November.

To contact the reporter on this story: Carlos Caminada at ccaminada1@bloomberg.net