Wednesday, January 23, 2008

Brazil Central Bank Likely to Keep Rates On Hold

Brazil's central bank will probably keep its benchmark interest rate unchanged at 11.25% today for a third straight meeting as policy makers gauge whether the recent acceleration in inflation is sustained. Against the backdrop of rising prices and Brazil's fastest growth since 2004, central bank President Henrique Meirelles decided on Oct. 17 to pause after a string of 18 straight cuts, the longest cycle of easing since Brazil adopted inflation targets in 1999.

Brazil's overnight rate has fallen by more than half over this period. The real interest rate, however, - or the difference between the 11.25 percent Selic benchmark lending rate and 4.46 annual inflation - is the sill highest in Latin America at 6.79 percent.

Policy makers will probably take the view that a worldwide economic slowdown will reduce Brazil's inflation rate by cutting demand for commodities, even after consumer prices jumped the most in more than two years in December. Inflation accelerated to 0.74 percent last month, led by food, the fastest pace since October 2005.

Rather than raising the central bank is much more likely to say that it will continue to monitor inflation to see whether it threatens its 4.5 percent target.

On the other hand, traders are forecasting higher rates. The yield on the interbank deposits future rate contract due January 2009 traded at 11.97 percent yesterday, above the current Selic rate.

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