MercoPress. South Atlantic News Agency

Brazil's central bank forecast to hold interest rate

Brazil's central bank this week could interrupt an eight-month cycle of monetary policy tightening, according to the country's leading financial institutions.

A consensus forecast published by the central bank on Monday predicts the bank's monetary policy committee on Wednesday will leave the prime interest rate unchanged at the current 19.5 per cent. Since September the central bank has increased the rate by 350 basis points.

Consumer prices rose above expectations in April, but economists say the long-term inflation outlook has improved in recent weeks. "Inflation expectations are moving closer to the central bank target," said Alexandre Lintz, economist at BNP Paribas, the investment bank, in São Paulo.

Inflation over the past 12 months totalled more than 8 per cent, compared with the upper inflation target for this year of 7 per cent. Yet at the same time, expectations for inflation during the next 12 months fell from 5.85 per cent last week to 5.46 per cent this week.

Since March, the appreciation of the real, Brazil's currency, has helped reduce inflationary pressure, Mr Lintz argues. "It's a classic inflation anchor, the central bank intentionally stopped buying dollars to let the real appreciate."

Labour and industry leaders as well as leftwing hardliners within the governing coalition of President Luiz Inácio Lula da Silva have recently stepped up their criticism against tight monetary policy.

"If the central bank raises rates any further, it will shoot itself in the foot," says Paulo Francini, head of economic research at Fiesp, the influential São Paulo industry federation. He argues that rising borrowing costs and an appreciating currency not only slowed industrial growth but could "lead to negative growth in coming months".

Marcel Solimeo, economist with the São Paulo commerce association, warned that "high interest rates are already stifling investment in several sectors of the economy".

Government allies expressed concern that the unpopular rate increases could begin affecting government support ahead of next year's general elections. Last week 600 leadersof the CUT, the countries largest labour union federation and a traditional allyof Mr Lula da Silva, called for "change in economic and particularly monetary policy".