Brazil sees 2011 inflation barely below ceiling
The bank suggested that the slower global economy could thus mean more interest rate cuts, following a surprise interest rate cut last month.
"The more restrictive economic environment abroad will likely stay for longer than expected and gives a disinflationary bias to both the global and domestic economy," the central bank noted in the report.
Policymakers in their quarterly inflation report raised their 2011 inflation view to 6.4 percent from 5.8 percent previously. For 2012, the bank forecast the benchmark IPCA index at 4.7 percent versus 4.8 percent before.
The increased 2011 estimate comes as inflation has run above a target ceiling of 6.5 percent since April, most recently hitting 7.33 percent in the 12 months through mid-September.
But policymakers repeated in the Thursday report that 12-month inflation will now begin to slow.
Analysts in a weekly central bank survey released on Monday forecast inflation for the year at 6.52 percent, just above the government target for this year and next of 4.5 percent plus or minus 2 percentage points.
The central bank last month cut its benchmark interest rate to 12 percent from 12.5 percent, citing the euro zone sovereign debt crisis and a sluggish US economy.
The cut has prompted economists and markets to slash their views for interest rates at the end of the year as well, with yields on interest rate futures contracts plummeting.
But other major economies in Latin America have yet to follow Brazil's example, pausing rate hikes but not yet cutting.
Brazil, Latin America's biggest economy, has the highest interest rates among major world economies. President Dilma Rousseff has often repeated her desire for borrowing costs to be more in line with those of global peers but the brisk inflation makes that tricky.
Getting those price pressures down is, in fact, another political priority for Rousseff, who inherited inflation at a six-year high when she took office in January. Inflation worries have threatened to overshadow her first year in office, becoming a focal point for discussion even as long-term reforms potentially stall.
Nor are Brazilians -- including the lower-income voters that make up Rousseff's power base -- particularly forgiving when it comes to inflation. With long memories of runaway prices in decades past, voters will almost certainly punish any politician who doesn't keep a tight rein on prices.
Rousseff has promised to cut about $30 billion from the budget this year to try to shift some of the burden for cooling the economy onto fiscal policy from monetary policy but analysts say rates remain a key inflation-control tool.
Copyright Reuters, 2011