MercoPress. South Atlantic News Agency

Brazil expected to raise benchmark interest rate as inflation “worsens”

Central bank President Alexandre Tombini: new measures to curb consumer credit

Brazilian Central bank President Alexandre Tombini admitted inflation forecasts may “worsen”. Consumer prices in the 12 months through mid-March rose 6.13%, the biggest jump in more than two years.

“It’s possible that we will see a marginal worsening in the perception of inflation by agents,” Tombini said during a speech to business leaders in Sao Paulo. ’’But in the absence of new shocks this process will tend to run out in the short term.’’

Analysts covering the Brazilian economy raised their 2011 inflation outlook to a high of 5.88%, according to the median estimate in a central bank survey published March 21. Traders are wagering the central bank will lift the benchmark interest rate to 12.75% percent by year-end in a bid to bring inflation back to target.

The Brazilian Central bank raised borrowing costs twice this year, pushing the Selic rate to 11.75% from 10.75% in December. Traders expect policy makers to lift the overnight rate by at least a quarter-point in its April meeting, interest rate futures show.

Tombini said that the impact of external price shocks takes time to fully reveal itself and that in the current global environment it’s even more challenging.

In a March 22 testimony to Congress, the head of the Central bank said policy makers may adopt new measures to curb consumer credit growth in a bid to cool demand. He said demand in Latin America’s biggest economy is currently outpacing production growth.

Domestic demand, coupled with a stronger Real, will help widen the current account deficit to a record 60 billion US dollars in 2011, up from 48 billion last year, the central bank said in a report distributed from Brasilia. Previously, the bank saw the current account gap widening to 64 billion this year. A 15 billion trade surplus, bigger than the previously estimated 11 billion, will help narrow the gap, the bank said.

Economic growth, which accelerated to 7.5% last year, will help the country attract foreign direct investment, expected to rise to a record 55 billion USD, Tulio Maciel, deputy head of the central bank’s economic research department, told reporters in Brasilia.

FDI rose to 7.7 billion in February while the account gap narrowed to 3.4 billion, down from 5.4 billion in January.

The fastest economic growth in more than two decades and a 40% rally by the Real since the end of 2008 have been fuelling imports as Brazilians travel abroad and boost spending on imported goods.