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July 1 (Bloomberg) -- Brazil’s industrial production rose less than forecast in May and at the slowest annual rate since November.

Output climbed 14.8 percent in May from the same month a year earlier, the national statistics agency said today in Rio de Janeiro, trailing economists’ forecasts for an increase of 17.8 percent, according to the median estimate of 33 analysts surveyed by Bloomberg. Production was unchanged in May from April, surprising economists who forecast 1.5 percent growth.

Industrial production has been increasing at an unsustainable rate, climbing at least 14 percent every month since November, said Diego Donadio, an economist at BNP Paribas in Sao Paulo. Today’s slowdown won’t be enough to persuade central bank policy makers to hold off on increases to the benchmark lending rate, he said.

“Figures show a significant deceleration, but output is still growing above its potential,” Donadio said. “The central bank will have to raise the Selic to 12.25 percent by year end to contain inflation expectations for 2011.”

Policy makers will raise the benchmark interest rate by 75 basis points, or 0.75 percentage point, in each of the next two meetings and by 50 basis points in October before pausing, Donadio said.

The yield on interest rate futures contracts due January 2011, the most traded on the Sao Paulo BM&F futures exchange today, fell two basis points to 11.34 percent at 9:00 a.m. New York time. The real, which has slid 3 percent against the U.S. dollar this year, gained 0.3 percent to 1.7998 per dollar.

Capital Output

Production of capital goods rose 1.2 percent in May from April, while consumer goods production fell 0.5 percent.

“The output of capital goods rising more than production is a healthy mix for policy makers because it favors a more contained inflation outlook,” Donadio said.

The central bank will raise the benchmark interest rate to 11 percent at its July 20-21 meeting, as 2010 growth expectations increased for a 15th straight week, according to the median forecast in a central bank survey of about 100 economists published June 28.

Policy makers have increased Brazil’s benchmark Selic rate twice this year to 10.25 percent, from a record low 8.75 percent in March, to prevent Latin America’s biggest economy from overheating.

Gross domestic product rose 9 percent in the first quarter of 2010 from the same quarter a year earlier, faster than any other major Latin American economy.

The government’s benchmark IPCA price index rose 5.22 percent in May from a year earlier. Annual price increases have exceeded the government’s 4.5 percent target every month this year and are forecast to remain above that level at least through 2011, according to the central bank survey.

To contact the reporter on this story: Joshua Goodman in Rio de Janeiro at; Matthew Bristow in Bogota at;

To contact the editor responsible for this story: Brendan Walsh at

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