Brazilian Central Bank Says Inflation Risk Is Easing

By Joshua Goodman and Katia Cortes

Dec. 18 (Bloomberg) -- Brazil’s central bank said declining commodity prices and shrinking credit caused by the global financial crisis were damping domestic demand and diminishing the risk of inflation being revived.

“The risk of a less benign inflation scenario materializing has fallen from a few months ago, though remains a relevant possibility,” policy makers said, according to the minutes of their Dec. 9-10 meeting released today on the central bank’s Web site.

The minutes may cement expectations that bank President Henrique Meirelles will cut rates at the bank’s next meeting Jan. 20-21, economists said. Inflationary pressure caused by a 30 percent slide in the real since September is being contained by the credit contraction, which the bank said could “magnify in a relevant way the impact of monetary policy.”

The majority of central bank policy makers discussed the possibility of cutting the benchmark interest rate by a quarter of a percentage point before deciding unanimously to leave the so-called Selic rate unchanged at 13.75 percent, citing an economic environment of “great uncertainty.”

Overnight futures contracts slid while the currency strengthened. The yield on the overnight futures contract for January 2010 delivery dropped 9 basis points to 12.41 percent at 8:33 a.m. New York time. The currency strengthened 0.6 percent to 2.3499 reais per dollar.

‘No Doubt’

Policy makers will probably cut rates at their next meeting Jan. 20-21 as the freeze in credit markets persists, outweighing the inflationary impact from a 30 percent slide in the local currency since September, analysts said.

“Barring a disaster, there’s now no doubt they’ll cut rates in January,” Carlos Thadeu de Freitas, chief economist at SLW Asset Management, said in a phone interview from Rio de Janeiro. “Policy makers aren’t just looking at inflation anymore; they’re also trying to head off a recession.”

Freitas is predicting a 50 basis-point cut at the next meeting, as the risk of deflation caused by slowing activity intensifies. The central bank last cut interest rates in September 2007, by 25 basis points.

Wholesale inflation slowed more than analysts expected in the 20 days since Nov. 21, the Getulio Vargas Foundation said today in the preview of its monthly IGP-M index.

The index rose 0.05 percent compared to the same 20-day period a month ago, surprising 15 of 20 analysts in a Bloomberg survey whose median estimate was for a 0.10 percent increase.

In the first 10 days of the collection period, prices rose 0.14 percent.

“In its evaluation of risk, the bank is asymmetrically pointing to a slowdown in demand overtaking inflation concerns,” said Freitas.

Jankiel Santos, chief economist at Banco Espirito Santo de Investimento SA, also expects the bank to cut rates in January.

To contact the reporter on this story: Joshua Goodman in Rio de Janeiro at jgoodman19@bloomberg.net