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Brazil Bank Signals Key Rate Stable on Easing Price Pressure

Brazil’s central bank signaled today it will keep interest rates at a record low for an extended period as it seeks to boost economic growth.

The rate-setting committee “assesses that the prospective scenario for inflation presents favorable signs and reaffirms its vision that inflation accumulated over 12 months is tending to converge toward the target, though in a non-linear fashion,” the bank said in the minutes to its Nov. 27-28 meeting published today.

The bank’s board, led by President Alexandre Tombini, voted unanimously last week to keep the benchmark Selic rate at a record low 7.25 percent, marking the end of the biggest easing cycle among the Group of 20 nations. Policy makers kept borrowing costs steady in an effort to slow inflation without aborting a slower-than-expected recovery.

While the economic outlook for the remainder of this year and next is favorable, a weak global expansion, falling wholesale prices, and excess domestic capacity will help inflation converge toward the target of 4.5 percent, the central bank said in the minutes.

Vague Language

The more vague language used by the bank to describe economic growth could indicate waning confidence in a recovery, said Enestor Dos Santos, senior economist at Banco Bilbao Vizcaya Argentaria SA.

“The conviction is not as strong,” Santos said in a telephone interview from Madrid. “There are two or three passages that show a more cautious position regarding the recovery.”

The bank’s rate decision preceded release of the third-quarter gross domestic product number, which showed the economy expanded at half the pace economists forecast.

In an attempt to accelerate recovery, policy makers will resume monetary easing and cut the benchmark rate to 6.25 percent next year, Banco Itau BBA SA said in a research report.

Traders see a 59 percent chance of a rate cut in the central bank’s March meeting, according to Bloomberg estimates based on interest rate futures.

Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo today, fell 13 basis points, or 0.13 percentage point, to 6.97 percent at 10:12 a.m. local time. The real strengthened 0.1 percent to 2.0854 per U.S. dollar.

Stable Policy

Stable monetary conditions for a “prolonged period of time” are the most adequate strategy to guarantee convergence of inflation to target, the bank said, repeating language it used following last week’s meeting.

Since August 2011, the bank has cut interest rates by 525 basis points as the government reduced taxes, pressured commercial banks to lower rates and raised tariffs to help manufacturers.

Brazil’s economy expanded 0.6 percent in the third quarter as investment fell for the fifth straight period. As a result, economists in the central bank’s latest survey cut their 2013 growth forecasts to 3.7 percent from 3.94 percent. They forecast GDP will expand 1.27 percent this year, less than the U.S. as well as Russia, India and China.

The government’s measures have set the stage for the economy to grow 4 percent in 2013, Finance Minister Guido Mantega said in an interview on Dec. 4.

Like Cocaine

“Lower interest rates, lower taxes and a more competitive exchange rate are the pillars of an economy that will start investing more,” Mantega said in his Brasilia office. “The economy was addicted to high interest rates. It’s an addiction almost like cocaine.”

Mantega announced yesterday a reduction in national development bank BNDES’ long-term lending rate, known as TJLP, to 5 percent from 5.5 percent effective in January. BNDES will also extend for another year by 100 billion reais ($47.9 billion) an emergency credit line established during the 2009 credit freeze to fund the purchase of capital goods. Of the total, up to 15 billion in loans can come from private banks against deposits they’re required to hold at the central bank, he said.

Some indicators show the economy may already have bottomed out. Retail sales in September grew for the fourth straight month, and industrial production in October rose from the previous year for the first time since August 2011. Consumer confidence reached its highest level in November since December 2010.

Even as growth remains sluggish, policy makers are still battling higher consumer prices. Inflation accelerated to 5.64 percent in the year through mid-November, the fastest pace since February. Economists in the latest central bank survey forecast it will slow to 5.4 percent in 2013.

Tombini said in an interview last month that inflation will converge to the central bank’s target by the third quarter of next year, though not necessarily in a linear fashion. Earlier in 2012 he repeatedly predicted it would reach the target by year-end.

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