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Brazil Signals Key Rate to Stay at Minimum for Record Period

Brazil signaled it plans to keep its benchmark rate at a record low for a period that economists predict will be the longest in history to prop up an economy heading toward its worst two-year performance in a decade.

Policy makers last night kept the Selic rate at 7.25 percent, ending the second-longest streak of reductions in an effort to prevent inflation from accelerating. The unanimous decision, which was forecast by all 75 economists surveyed by Bloomberg, took into account the “the balance of risks for inflation,” the board said in its statement, which was almost identical to last month’s announcement.

Central bankers led by President Alexandre Tombini reiterated their intent to keep rates steady for a “prolonged period” as they try to keep inflation within their 2.5-to-6.5 percent target range without derailing the economy’s recovery. Economists surveyed by the central bank forecast that the Selic will remain unchanged through 2013.

“Interest rates are at a level that allow for the economy to rebound at a pace moderate enough to contain inflation below the upper range of the target,” Marcelo Salomon, co-head for Latin America economics at Barclays Plc, said in a phone interview from New York. “The idea is to leave interest rates at a minimum for as long as possible.”

Swap rates on the contract maturing in January 2014 rose three basis points, or 0.03 percentage point, to 7.32 percent at 9:04 a.m. local time. The real strengthened 0.2 percent to 2.0896 per U.S. dollar.

Slowest Average

Brazil’s economy will post average economic growth of 2.23 percent a year in the 2011-2012 period, according to the median forecast in a central bank survey published this week. That would be the slowest two-year average since the 1.91 percent pace of 2002-2003.

Slower growth has failed to tame inflation, which accelerated to the fastest pace in nine months in mid-November and has remained above the central bank’s 4.5 percent target for more than two years.

Consumer prices, as measured by the IPCA-15 index, rose 5.64 percent in mid-November from 5.56 percent the previous month, and will remain above the target through at least next year, the central bank survey shows.

Borrowing Costs

In addition to reducing borrowing costs by 5.25 percentage points over the previous 10 meetings, President Dilma Rousseff’s administration has cut taxes, increased public spending and freed up billions of reais in credit to bolster a recovery that remains uneven.

In the aftermath of the 2008 collapse of Lehman Brothers Holdings Inc., the central bank kept the key rate at a record low 8.75 percent for nine months to boost growth.

“Economic growth has been moderate, and inflation is still worrisome for the central bank because it is still above target,” Fernando Fix, chief economist at Votorantim Asset Management, said in a telephone interview from Sao Paulo. “The economy has started to show signs of recovery, and the central bank is signaling that it’s important to keep an eye on inflation risks.”

Economists surveyed by the central bank expect growth to more than double next year, to 3.94 percent.

Tax Breaks

Retail sales rose for the fourth straight month in September, and tax breaks that were extended twice already led car sales to jump 19 percent in October from the previous month.

Still, industrial output fell in September for the first time in four months on a drop in machine and equipment investments.

While a government report on Nov. 30 is likely to show that gross domestic product growth accelerated in the third quarter to the fastest pace in more than a year, economists surveyed by the bank have reduced their forecast for 2013 in each of the past two weeks.

Growth this year shouldn’t surpass 1.5 percent, the same survey shows.

Tombini is forecasting that falling wholesale prices will help bring inflation back to its target by the third quarter of next year. Brazil’s IGP-M index, which is 60 percent weighted to wholesale prices, fell in November by 0.03 percent from the month before, the first decline since February.

Weaker Real

Economists say that is optimistic, and point to recent efforts by the government to weaken the real -- the worst-performing major currency this year -- as a new risk to the bank’s benign price outlook.

They’re forecasting prices will rise 5.4 percent in 2013, according to the latest bank survey.

Finance Minister Guido Mantega on Nov. 23 said that Brazil’s currency, which has declined 10.8 percent against the dollar this year, is still not at an “entirely satisfactory” level.

The divergence over Brazil’s inflation outlook mirrors the debate over interest rates. While analysts surveyed by the central bank expect policy makers to keep the benchmark rate unchanged throughout next year, traders are betting that policy makers will raise it to 8 percent by the end of 2013 to keep price increases under control, swap rates show.

The central bank will try to slow inflation by introducing credit curbs, such as higher reserve and capital requirements, before raising interest rates, said Italo Lombardi, economist at Standard Chartered Bank.

“The central bank will try not to hike rates all next year,” Lombardi said in a telephone interview from New York. “They are signaling that they seem to be conformable with the balance of risk of inflation and growth”

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