Meirelles May Raise Brazil Rate as Prices Threaten Bank Target

By Andre Soliani

July 23 (Bloomberg) -- Brazil's central bank will probably raise its interest rate for a third consecutive meeting today to slow inflation from a 2 1/2-year high.

Policy makers led by President Henrique Meirelles will increase the benchmark lending rate to 12.75 percent from 12.25 percent, according to 31 of 45 economists surveyed by Bloomberg. Fourteen others forecast the bank will increase the so-called Selic rate to 13 percent.

``The inflation scenario has worsened since the last central bank meeting in June,'' Marcelo Salomon, chief economist at Unibanco SA, said in a telephone interview. ``Our main concern is the strong level of demand, which increases the probability of higher wholesale prices spilling over.''

Meirelles will miss his inflation goal this year for the first time since 2003, according to a survey of about 100 economists by the central bank. Inflation will accelerate to 6.53 percent this year, above the 2.5 percent to 6.5 percent target range, according to the survey published this week.

The central bank wants to prevent the longest streak of household spending growth since 1994 from stoking inflation in Brazil's $1.3 trillion economy, Latin America's largest.

Brazil's real rose to the highest in nine years against the U.S. dollar yesterday on speculation the central bank will raise rates, boosting the yield advantage that local assets have relative to the U.S. The real gained 0.2 percent to 1.5794 and earlier yesterday traded at 1.576.

Interest Rate Futures

The yield on the interest-rate futures contract due January 2009 rose 0.38 percentage point to 13.5 percent yesterday since the last central bank rate announcement June 4.

Brazil's economy created a record 309,442 government- registered jobs in June as higher domestic demand coupled with rising commodity prices prompted companies to add staff and increase production, a July 17 Labor Ministry report showed.

The economy grew 5.8 percent in the first quarter after expanding 6.2 percent in the fourth, the fastest in 3 1/2 years. Retail sales in May jumped 10.5 percent from a year ago, up from 8.7 percent in April, the national statistic agency said July 15. Sales climbed more than 10 percent in four of the six first months of this year.

The bank started to raise rates at the April 15-16 meeting after holding policy unchanged for six months at a record low of 11.25 percent. Policy makers have increased the rate by half a percentage point in each of the two past meetings.

Since adopting inflation targeting in 1999, policy makers missed the target three times, in 2001, 2002 and 2003.

`More Complicated'

Meirelles told senators in Brasilia on July 15 the bank will act ``vigorously'' to ensure next year's inflation will be in line with the 4.5 percent midpoint of the target.

Alexandre Sant'Anna, an economist at Rio de Janeiro-based BNY Mellon ARX, is among the 14 economists polled by Bloomberg who expect a rate increase of three-quarters of a percentage point.

``It's now clearer inflation isn't limited to food and has spread to other sectors,'' said Sant'Anna. ``The situation has become more complicated.''

Wholesale prices as measured by the IGP-DI index jumped 17.9 percent in the 12 months through June, the biggest gain in almost five years, led by agricultural products and raw materials.

``We'll be seeing some of this wholesale inflation contaminating retail prices in the second half of the year,'' said Sergio Vale, an economist with MB Associados in Sao Paulo.

Should oil prices remain at current levels, state-controlled oil company Petroleo Brasileiro SA may need to increase gasoline and diesel prices, which are already about 30 percent below international costs, Vale said.

To contact the reporters on this story: Andre Soliani in Brasilia at at soliani@bloomberg.net