MercoPress. South Atlantic News Agency

Concerns with Inflation Anticipate Brazil will Raise Benchmark Interest Rate

Meirelles trusts inflation and higher interest rates will help cool domestic demand

Brazil’s next government will need to be “very serious” about keeping inflation within its target range so real interest rates can continue to fall, Central Bank President Henrique Meirelles said.

“Real interest rates are on a downward trend”  Herique Meirelles said at an event in New York. “It’s important that in order to keep it that way, the next government be very serious about keeping inflation inside the target.”

Inflation in the 12 months though mid-April accelerated to an 11-month high of 5.22% and exceeded the government’s 4.5% target for the third month in a row. Brazilian economists expect policy makers meeting this week to raise the benchmark interest rate for the first time since September 2008 to slow inflation.

The Central Bank of Brazil has kept the overnight rate at a record low 8.75% since July to foster economic growth that may quicken this year to the fastest pace in more than two decades. Brazil lowered borrowing costs to fight the global financial crisis, spurring credit growth and boosting domestic demand.

Brazil’s real interest rate, or the difference between the 8.75% benchmark rate and the country’s 5.22% annual inflation rate, is 3.53%, which is the third highest among 53 countries. Meirelles said that inflation and higher interest rates will help cool demand ensuring that Brazil will grow sustainably and with prices under control.

Analysts are split over the size of the interest rate increase they see policy makers implementing at the end of their two-day meeting this week. While some economists expect a half-point increase in the Sistema Especial de Liquidação e Custodia (SELIC) to 9.25%, others estimate an increase of three quarters of a percentage point.

Meirelles added that Brazil’s current account deficit won’t keep widening at the same pace and will begin to “adjust” as the global recovery fuels demand for Brazil’s exports.

Brazil on April 22 said the current account gap widened in March to the highest this year. The deficit in the current account, the broadest measure of trade in goods and services, rose to 5.1 billion USD in March after a 3.3 billion gap in February, the central bank said in a report distributed in Brasilia.