UPDATE 2-Brazil prices jump, adding pressure for rate hikes

  
 * Brazil March IPCA price index up 0.79 pct from Feb
 * 12-month inflation at 6.30 pct through March
 * Central bank under pressure to raise interest rates
 (Adds context, market reaction, economist comment)
 By Luciana Lopez and Todd Benson
 SAO PAULO, April 7 (Reuters) - Consumer prices in Brazil
rose more expected in March, pushing the annual inflation rate
near the top of a government ceiling and putting more pressure
on the central bank to raise interest rates.
 Brazil's benchmark IPCA consumer price index (BRCPI=ECI: Quote, Profile, Research)
climbed 0.79 percent in March versus a 0.80 percent rise in
February, government statistics agency IBGE said on Thursday.
 That was not only above the 0.7 percent median forecast in
a Reuters survey but also above the highest of 17 forecasts in
the poll, which was 0.78 percent.
 The jump in March bought the 12-month inflation rate to a
lofty 6.3 percent, up from 6.01 percent in the year through
February and just shy of the 6.5 percent ceiling of the
government's inflation target range for this year.
 The nagging inflation pressures are shaping up as major
policy challenge for the new government of President Dilma
Rousseff, who is scrambling to find ways to cool domestic
demand without derailing the economy.
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 Brazil's economic growth:      http://r.reuters.com/tux38r
 Graphic on interest rates:     http://r.reuters.com/rur78r
 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
 The government has used a mix of higher interest rates and
so-called macroprudential measures -- such as limiting banks'
ability to offer loans -- in its crusade to rein in inflation,
but consumer demand and credit growth remain strong, putting
pressure on prices.
 That means Brazil's central bank may have to raise
borrowing costs again at its next two-day policy meeting ending
on April 20, a step the government would prefer to avoid.
Brazil's sky-high interest rates are attracting a flood of
foreign capital in search of high yields, driving the country's
currency its strongest level in two and a half years.
 "The economic team is defending the use of macroprudential
measures, but short term I think the markets are doubting the
impact of those," said Flavia Cattan-Naslausky, strategist at
RBS Securities.
 "The market is telling them we are not convinced that these
macroprudential measures will work soon enough to prevent the
contamination of inflation expectations."
 On Thursday, the Brazilian real (BRBY: Quote, Profile, Research) jumped 1 percent in
early trading to 1.598 per dollar, a day after the government
unveiled a new measure aimed at curbing the flow of capital
into the country. The market reaction highlighted the
widespread view that Brazil has few good options to prevent the
real from strengthening further. [ID:nN06227464]
 The currency rally is creating a host of problems for
Brazil -- cheap imports are pouring into the country at the
expense of Brazilian-made goods, and exporters are struggling
to compete on global markets.
 FOOD PRICES STILL A WORRY
 Food prices and transport costs were among those categories
that rose the most in March. Both have been a global worry,
particularly as violence in the Middle East and North Africa is
stoking fears of disrupted petroleum supplies.
 Brazil, Latin America's biggest economy, grew 7.5 percent
last year as millions of new members to the middle class
splurged on big-ticket items, becoming first-time car buyers
and snapping up home appliances.
 But those shopping sprees also stoked inflation, with the
IPCA closing 2010 at its highest calendar-year level in six
years. Annual inflation has kept gaining steam since then.
 The central bank is targeting inflation of 4.5 percent plus
or minus 2 percentage points this year.
 Policy-makers meet on April 19 and 20 to consider raising
the benchmark Selic lending rate from its current 11.75
percent, already among the world's highest.
 The central bank has signaled its reluctance to raise the
Selic much further, fearing that higher rates could slow the
economy too much while also feeding the currency rally.
 Policy-makers instead have highlighted their preference
for macroprudential measures, such as the hike in bank reserve
requirements in December.
 For the IGBE report on inflation, please go to:
http://www.ibge.gov.br/home/presidencia/noticias/noticia_visualiza.php?id_noticia=1856&id_pagina=1&titulo=IPCA-de-marco-fica-em-0,79%
 (Additional reporting by Rodrigo Viga Gaier in Rio de Janeiro;
Writing by Todd Benson; Editing by W Simon  )



UPDATE 2-Brazil prices jump, adding pressure for rate hikes