Brazil Central Bank Sees Faster 2014 Inflation on Weak Real

Brazil’s central bank increased its 2014 inflation forecast as a weaker currency undermines the world’s biggest interest rate increase. Swap rates rose.

Consumer prices will rise 5.7 percent next year even if policy makers raise the benchmark interest rate to 9.75 percent by November, the quarterly inflation report published today shows. The increase compares with a 5.2 percent forecast in June and would mark the fifth straight year that inflation breaches the 4.5 percent target. The central bank also cut its 2013 growth estimate to 2.5 percent from 2.7 percent.

Central bankers have increased the key rate by 175 basis points since April, the most among 49 economies tracked by Bloomberg, to arrest inflation that breached their target range twice this year, eroding consumer and business confidence. Traders increased bets today policy makers will raise the benchmark rate by another half a percentage point to 9.5 percent next month. Policy makers are tightening monetary policy to mitigate the impact on prices of the second biggest decline among major currencies in the past six months.

“The Committee highlights that in moments like now monetary policy must remain particularly vigilant to minimize the risk that high inflation rates, as observed during the last 12 months, persist,” the central bank said today.

Swap Rates

Swap rates on the contract due in January 2015, the most traded in Sao Paulo today, rose nine basis points, or 0.09 percentage point, to 10.23 percent at 3:57 p.m. local time. The real gained 1.5 percent to 2.2195 per dollar, paring its six-month decline to 8.9 percent. The Australian dollar fell 10.5 percent in the same period.

Gradual Investimentos today raised its 2013 year-end interest rate forecast to 10 percent from 9.5 percent on the central bank’s inflation views, according to chief economist Andre Perfeito.

A higher 2014 inflation forecast together with a more positive central bank outlook on global economic activity may be driving interest rate futures higher, according to Enestor Dos Santos, principal economist at BBVA.

Officials have signaled they will keep in place a $60 billion currency intervention program that has helped strengthen the real from an almost five-year low in August.

The central bank said its inflation outlook takes into account a fiscal policy that will help close the gap between demand and output. It said the government has room to shift fiscal policy to neutral from expansionary.

The primary budget showed a deficit of 432 million reais ($195 million), the first deficit on record for the month of August, due to slow economic growth and tax breaks that diminish revenue, Tulio Maciel, head of the central bank’s economic research, told reporters in Brasilia today.

Brazilian consumer pries, as measured by the IPCA-15 index, rose 5.93 percent in the year through Sept. 12, the national statistics agency said on Sept. 20. It was the first time in nine months annual inflation slowed below 6 percent. The central bank’s target range is from 2.5 percent to 6.5 percent.

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