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Brazil Said to See Credit Curbs Same as Rate Increase

Brazil’s central bank estimates that an increase this month in reserve and capital requirements is equivalent to lifting the benchmark interest rate by 0.5 percentage point to a full point, said a person familiar with the bank’s decision-making process.

Policy makers decided to hold the overnight rate at 10.75 percent this month because tighter credit rules announced Dec. 3 had an impact similar to raising interest rates, said the person, who asked to remain anonymous because the estimates aren’t public.

The monetary authority signaled yesterday in its quarterly inflation report that it may start increasing interest rates next month to lower inflation from a 23-month high.

Michael Shaoul, Oscar Gruss & Son Inc.’s chief executive officer, said there’s no guarantee Brazil’s attempt to calibrate the equivalent monetary impact from its macro-prudential policy steps is “in any way correct.”

“One of the great problems with central banks going down the path of macro-prudential monetary policy is judging the level of tightness in effect,” Shaoul wrote in an e-mail.

The central bank, in leaving the Selic rate unchanged this month, said it needed more time to gauge the economic impact from the tighter reserve requirements. The bank, in the minutes to its meeting, said the measures aren’t a “perfect substitute” for raising rates, since they are part of an effort to reverse stimulus measures adopted during the global financial crisis.

Yields on interest rate futures contracts due in January 2012, the most traded in Sao Paulo, rose 4 basis points to 12.15 percent at 2:56 p.m. New York time. The real strengthened 0.5 percent to 1.6913 per U.S. dollar.

The central bank raised its 2011 inflation forecast to 5 percent, up from 4.6 percent in September, according to the so-called reference scenario published in the quarterly inflation report. Policy makers forecast inflation will also exceed its 4.5 percent target in 2012, when consumer prices will rise 4.8 percent. The bank’s reference scenario assumes the benchmark interest rate remains unchanged.

An increase in borrowing costs of 150 basis points as analysts are forecasting would slow inflation to between 4.5 percent and 4.8 percent by the end of 2011, assuming the real remains stable, Carlos Hamilton, central bank economic policy director told reporters yesterday.

The central bank will need to raise rates 225 basis points to 13 percent to bring inflation back to target, Alexandre Schwartsman, chief economist at Banco Santander in Sao Paulo, wrote today in an emailed report.

Schwartsman said that the inflation report published yesterday made it clear policy makers will no longer rely on macro-prudential measures, and resort to interest rate increases to combat inflation.

Consumer prices in the 12 months through mid-December rose 5.79 percent, the biggest annual gain in 23 months, on higher food prices. It was the fourth consecutive month prices as measured by the IPCA-15 index exceeded the government’s target.

Traders are wagering the central bank will increase the overnight rate 50 basis points to 11.25 percent in January and lift it to as much as 13 percent by end of 2011, according to Bloomberg estimates based on interest rate futures contracts.

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