Brazil Economists Raise 2012 Inflation Forecast for 6th Straight Week

Economists covering Brazil raised their 2012 inflation forecast for a sixth straight week in expectation that a weaker real and cuts in borrowing costs will stoke faster price increases.

Analysts raised the estimate to 5.59 percent from 5.53 percent a week earlier, according to the median estimate in an Oct. 7 central bank survey of about 100 economists published today. They also raised their forecast for 2013 inflation to 4.85 percent from 4.80 percent, according to the weekly survey.

“In part this could reflect the worsening expectations for the exchange rate,” Zeina Latif, a senior economist with RBS Securities Inc. in Sao Paulo, said in a telephone interview. “Markets could be expecting that the drop in commodities prices is not enough to compensate for the foreign exchange pressure.”

The faster inflation expectations could limit the central bank’s room to reduce interest rates, Latif said. Brazil’s central bank President Alexandre Tombini last week said that “moderate” cuts in rates will help shield the economy from the European debt crisis without compromising the inflation target. Tombini has repeatedly pledged to slow inflation to the bank’s 4.5 percent target by the end of 2012.

‘Substantial Deterioration’

Tombini surprised analysts Aug. 31 by slashing the benchmark Selic rate 50 basis points to 12 percent, citing a “substantial deterioration” in the global outlook. Analysts expect another 0.5 percentage point cut at the central bank’s policy meeting next week, the survey showed.

The yield on the interest rate futures contract maturing in January 2013, the most traded in Sao Paulo today, rose six basis points, or 0.06 percentage point, to 10.49 percent at 8:25 a.m. New York time. The real appreciated 1.8 percent to 1.7404 per dollar.

Economists forecast the Brazilian currency to end next year at 1.75 per U.S. dollar, compared with a forecast of 1.70 a week earlier.

This year, consumer prices as measured by the IPCA index are forecast to rise 6.52 percent, unchanged from the previous week’s survey.

Consumer prices rose 7.31 percent in the year through September, exceeding the 6.5 percent upper limit of the central bank’s target range for a sixth straight month. The bank targets inflation of 4.5 percent, plus or minus two percentage points.

Latin America’s biggest economy will grow 3.50 percent this year, less than a forecast of 3.51 percent the previous week, according to the survey. Analysts held their 2012 growth forecast at 3.70 percent.

The S&P GSCI Index of commodities gained 2.6 percent last week. Commodities rose 7.8 percent in September, according to the central bank’s commodities price index, which tracks prices of raw materials it says are most relevant to Brazil.

To contact the reporter on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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