UPDATE 3-Brazil central bank sees inflation up, GDP growth down

Thu Jun 27, 2013 5:59pm BST

* Raises inflation forecast to 6 pct in 2013 vs 5.7 pct previously

* See 2014 inflation at 5.4 pct vs previous view of 5.3 pct

* Price outlook may prompt bank to speed up rate increases

* Cuts view on 2013 GDP growth to 2.7 pct from previous 3.1 pct

* Bank to "use all instruments" to bring inflation down- Araujo

By Alonso Soto and Silvio Cascione

BRASILIA/SAO PAULO, June 27 (Reuters) - Brazil's central bank raised its inflation forecasts for 2013 and 2014, signaling that policymakers could accelerate the pace of interest-rate increases in coming months to bring down persistent price pressures.

In its quarterly inflation report released on Thursday, the central bank raised its 2013 inflation forecast to 6.0 percent from 5.7 percent.

That is above the bank's own informal goal for the year to bring inflation below the 5.84 percent posted in 2012. The new forecast for 2013 topped private estimates in a weekly central bank survey.

Central bank director Carlos Hamilton Araujo later told reporters that the bank will keep working this year to bring inflation down below 2012 levels and use "all instruments" available to keep prices under control.

Araujo, director of economic policy, added that the "key message" in the report was inflation control - a more hawkish tone in a bank that only two months ago was betting that a slowing global economy would push down prices at home.

Jankiel Santos, chief economist with Espirito Santo Investment Bank in Sao Paulo, said, "These numbers tell you that they should accelerate the pace of rate hikes. But I still have doubts on whether they will actually do it.

"Given the exchange rate," Santos said, "we could see even higher inflation ahead."

The central bank surprised investors by stepping up the pace of tightening with a 50-basis-point rate increase at its last meeting on May 29. The bank, which meets again on July 10 for a decision on rates, is expected by many in the market to raise its benchmark Selic rate by 75 basis points to 8.75 percent.

However, a sluggish economy has raised the stakes for central bank chief Alexandre Tombini, who is under pressure to curb inflation without hurting a fragile recovery.

The bank revised its estimate for economic growth to 2.7 percent this year from a previous forecast that gross domestic product would grow at an annual rate of 3.1 percent. Despite the drop, the bank's forecast still looks optimistic to most private economists, whose median forecast in the bank's weekly survey estimates GDP growth this year of 2.46 percent.

The widespread nature of price increases has kept inflation persistently high, the bank said in the report, warning again that 12-month inflation has an upward trend in the short term and the outlook for prices is "unfavorable."

"Monetary policy must remain vigilant in order to minimize risks of high levels of inflation," the bank said, repeating the same language used in the minutes from its last rate-setting meeting. The bank added that it expected global inflation to increase.

The central bank calculated that there is a 29 percent chance of annual inflation ending the year above the 6.5 percent ceiling of its official target. The deterioration of inflation expectations is a "relevant risk" for price dynamics by itself, the bank added.

REAL'S DROP AND 2014 INFLATION

A sharp depreciation of the Brazilian real over the last month could accelerate inflation further by making imported goods more expensive. The real is trading at its weakest levels in four years.

Nonetheless, the bank said in the report that the exchange- rate pass-through has decreased over the last decade and the current rate-increase cycle tends to soften the impact of a weaker real over domestic prices.

Brazil has also called on its peers in the BRICS group - Russia, China, India and South Africa - to work together to fight the appreciation of the U.S. dollar abroad.

A freeze of public transportation fares in major cities following a rash of street protests of the bad quality of public services could help offset the impact of more expensive imports, some economists said.

In the report, which included the lower fares, the bank increased its inflation view for 2014 to 5.4 percent from 5.3 percent previously - well above the center of the official target of 4.5 percent - plus or minus two percentage points.

The bank, however, acknowledged that a pickup in activity should increase tax revenue and improve the government's fiscal results, which remain expansionist or negative for inflation.

President Dilma Rousseff's government has stepped up spending and offered billions of dollars in tax cuts to revive an economy that is likely to post a third year of disappointing growth in 2013. Last year, Brazil's economy grew 0.9 percent.

In the previous decade, the Brazilian economy grew an average 3.6 percent a year.

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