Brazil Economists Raise Key Rate Forecast to Double Digits

Brazil economists raised their key rate forecast for this year and next to double digits for the first time, as policy makers signal they will extend the world’s biggest tightening cycle to slow inflation.

Brazil’s central bank will raise the Selic to 10 percent this year, compared with the previous week’s forecast of 9.75 percent, according to the Oct. 18 central bank survey of about 100 analysts published today. Officials will boost borrowing costs to 10.25 percent next year, up from the previous week’s estimate of 9.75 percent, the survey showed.

President Dilma Rousseff’s administration has renewed pledges to keep inflation under control, as the biggest decline among major currencies pressures consumer prices. Policy makers on Oct. 9 increased the benchmark rate by 50 basis points to 9.50 percent and reiterated that the decision will help stem inflation. In the minutes to their monetary policy meeting published last week, central bankers affirmed that the current pace of key rate increases is appropriate, as high inflation pressured by a weaker real undermines growth and job creation.

Swap rates on the contract due in January 2015 were unchanged at 10.51 percent at 9:17 a.m. local time. The real weakened by 0.2 percent to 2.1736 per U.S. dollar. Brazil’s currency has dropped 7.4 percent in the past six months, the most among 16 major currencies tracked by Bloomberg.

The real will weaken to 2.40 per dollar in December 2014 from 2.25 at the end of this year, according to the central bank survey. That compares with last week’s estimates of 2.40 and 2.29 for 2014 and 2013, respectively.

Upper Limit

While Brazil’s consumer prices rose 5.75 percent in the year through mid-October, the slowest since November 2012, both monthly and annual inflation accelerated more than economists expected, the national statistics agency said on Oct. 18. Inflation has exceeded the 6.5 percent upper limit of the central bank’s tolerance range twice this year. The bank targets inflation of 4.5 percent plus or minus two percentage points.

The central bank has raised the benchmark Selic by 225 basis points since April. That’s 75 basis points more than Indonesia, the only other major world economy that has lifted borrowing costs this year.

Brazil’s industrial production unexpectedly stalled in August from the month prior, as retail sales in the same month exceeded economists’ forecasts and grew 0.9 percent, according to the national statistics agency. Total economic activity in August rose 0.08 percent, compared with analysts’ estimates of 0.2 percent growth, the central bank said on Oct. 16.

The bank last month lowered its 2013 growth forecast to 2.5 percent. While that’s down from 3.1 percent at the start of the year, it’s faster than the 0.9 percent growth recorded in 2012.

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