Economists see Brazil's 2011 inflation above target

SAO PAULO: Economists in Brazil see annual inflation in 2011 above a government target ceiling, adding to worries that the central bank's interest rate cut last month may have been premature.

Analysts in a weekly central bank survey released on Monday forecast the benchmark IPCA index to rise 6.52 percent for the year, up from a previous forecast of 6.46 percent and just above a 6.5 percent government ceiling.

"This reflects the inflationary pressures that are going to be reinforced by a weaker currency," said Newton Rosa, chief economist with SulAmerica Investimentos in Sao Paulo.

"But I think this won't play a big role in the central bank's decisions at the moment," he added. "They're looking out to 2012."

The IPCA has not ended a calendar year above target since 2003.

Should that happen this year, the central bank president, Alexandre Tombini, will be required to publish an open letter to the finance minister, explaining why the target was missed, what the bank is doing to bring inflation back to target, and when those measures would take effect.

Global and domestic factors have pushed up consumer prices this year, from severe weather in major food-producing countries, which hit commodity prices, to wage growth in Brazil.

A recent weakening of the real has added to those worries because it makes imported goods pricier for Brazilians.

Inflation in the 12-month period to mid-September sped to 7.33 percent, just weeks after the central bank, at the close of last month, cut its benchmark interest rate to 12 percent from 12.5 percent, citing the euro zone sovereign debt crisis and expectations for sluggish global growth this year.

"It's a risky strategy, isn't it?" said Luciano Rostagno, chief strategist with CM Capital Markets. "Up until now we haven't seen any inflation data confirming that the crisis abroad will have a significant impact on prices here."

Higher interest rates could help curb inflation, but could also brake economic expansion. The result is a difficult balance for policy makers.

In the United States, the Federal Reserve last week announced more stimulus for the faltering economy, citing "significant" downside risks.

In contrast, other major central banks in Latin America have kept interest rates on hold recently but have yet to cut.

Economists in the central bank survey saw the IPCA rising 5.52 percent in 2012, still above the center of the target, set this year and next at 4.5 percent plus or minus 2 percentage points.

The survey's predictions represent the median forecast of analysts polled by the central bank at about 100 financial institutions.

The Selic interest rate should end the year at 11 percent, economists said, and dip to 10.75 percent in 2012.

Copyright Reuters, 2011