Brazil Economists Raise Forecast for Year-End Benchmark Rate

Analysts covering Brazil’s economy raised their forecast for the year-end benchmark rate for the first time in 2012, as faster inflation cements expectations the central bank has completed its rate-cutting cycle.

Brazil’s Selic rate will be 7.5 percent at year-end, according to the median estimate in a central bank survey of about 100 analysts published today. Analysts had forecast a rate of 7.25 percent the previous week.

Since last August, policy makers led by central bank President Alexandre Tombini have cut the Selic by 500 basis points to a record low 7.5 percent in an effort to spur Brazil’s economic growth, which trailed Japan and the U.S. in the second quarter. On Sept. 14, the central bank reduced reserve requirements to free up 30 billion reais ($14.8 billion) in credit. Still, inflation rates above the central bank’s 4.5 percent target will limit Selic cuts, according to Daniel Snowden, emerging markets analyst at Informa Global Markets.

“The central bank needs to try and get inflation down to 4.5 percent, but it doesn’t look like that is going to happen,” Snowden said in a telephone interview from London. “It’s come to crunch time now, and it doesn’t look like they’ll be able to cut rates further.”

The economists surveyed by the bank raised their forecast for 2012 inflation to 5.35 percent from 5.26 percent the previous week, while leaving unchanged at 5.50 percent their prediction for inflation next year.

Stimulus Measures

The largest emerging market after China is showing signs of responding to the stimulus measures. Retail sales in July beat economists’ forecasts and rose at the second-fastest pace since January, while vehicle sales rose to a record 420,101 in August. Steady employment has helped sustain consumer demand, as Brazil’s unemployment rate fell to 5.3 percent in August, the lowest ever for that month, and has remained close to record lows all year.

Brazil’s inflation quickened for the third straight month through mid-September, to 0.48 percent. Earlier this month, Tombini told a Senate hearing that price increases will slow to the 4.5 percent target in a “non-linear” way by year-end.

Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo today, fell two basis points, or 0.02 percentage point, to 7.76 percent at 9:37 a.m. local time. The real declined 0.2 percent to 2.0271 per dollar.

While consumption may be picking up, local manufacturers are struggling to remain competitive against cheaper imports. Brazil’s industrial production fell 2.9 percent in July from a year ago. Finance Minister Guido Mantega said last week that Brazil will take all necessary measures to prevent the real from strengthening in order to shield Brazilian manufacturers from the effects of the latest round of U.S. monetary easing.

This month, Mantega cut his 2012 economic growth expectations to 2 percent from 3 percent, adding that the economy will expand more than 4 percent next year.

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