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Brazil Signals Faster Pace of Key Rate Increase to Continue

Brazil’s central bank said intensifying the pace of monetary tightening is appropriate, reinforcing bets it will raise its benchmark rate by a full percentage point over the next two meetings. Swap rates rose.

The bank’s board surprised analysts last week for the first time since President Alexandre Tombini took office in January 2011 with a larger-than-forecast interest rate increase. It raised the benchmark Selic rate by half a percentage point to 8 percent, versus predictions for a second consecutive quarter-point boost by 38 of 57 analysts polled by Bloomberg.

The outlook for disperse and accelerating inflation is unfavorable and needs a timely reversal to avoid undermining investment and demand, policy makers said in the minutes to their May 28-29 meeting published on their website today. The central bank stepped up the pace of interest rate increases last month after the economy unexpectedly slowed in the first quarter and inflation continued to hover around the upper limit of the target range.

“What the bank is saying is that it accelerated the pace and will keep the faster pace as long as it’s required,” Marcelo Salomon, co-head for Latin America economics at Barclays Plc, said in a phone interview from New York. “This is a central bank that doesn’t like the level of current inflation and will act.”

Swap Rates

Swap rates on the contract due in January 2015, the most traded in Sao Paulo today, rose 15 basis points, or 0.15 percentage point, to 9.25 percent at 11:21 a.m. local time. The real fell by less than 0.1 percent to 2.1289.

The minutes are consistent with traders’ expectations of two more 50 point increases in July and August, respectively, followed by a final 25 point rise in October, Salomon said.

The central bank started its tightening cycle in April with a 25 basis point increase, after annual inflation accelerated to 6.59 percent in March. Policy makers target annual inflation of 2.5 percent to 6.5 percent.

“The committee considers it’s appropriate to intensify the pace of adjustment of current monetary conditions,” according to the minutes. Twelve-month inflation will probably continue to rise in the short term and “the balance of risks for the future scenario is still unfavorable.”

Inflation in April slowed to 6.49 percent and is forecast to have accelerated to 6.51 percent in May, according to a Bloomberg survey of 23 economists. The national statistics agency is scheduled to release May’s consumer prices tomorrow.

Rousseff’s Support

President Dilma Rousseff agreed with the need for the central bank to adopt a more aggressive tone against inflation and fully supported its monetary policy, a government official knowledgeable of economic policy said last week.

Latin America’s largest economy expanded 0.55 percent in the first three months of 2013, compared to 0.64 percent in the fourth quarter last year as consumption slowed. It was fifth consecutive quarter of slower-than-expected growth.

Brazil’s gross domestic product expanded by 0.9 percent in 2012, the slowest pace since the aftermath of the Lehman Brothers Holdings, Inc.’s collapse in 2008. The central bank forecasts 3.1 percent growth for this year.

Policy makers shifted their concern to inflation from economic growth, Enestor dos Santos, senior Brazil economist at Banco Bilbao Vizcaya Argentaria SA, said by phone from Madrid.

“Concerns regarding the economic recovery and the global economy are on a lower level,” he said. “They are secondary compared to inflation.”

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