UPDATE 2-Brazil’s central bank hints at higher lending costs

* Central bank raises 2010, 2011 inflation forecasts

* Rate changes might be needed because of price pressures

* 2010 GDP held unchanged, 2011 GDP seen at 4.5 pct
(Adds yields, comment)

SAO PAULO, Dec 22 (BestGrowthStock) – Brazil’s central bank on
Wednesday gave one of its strongest hints yet that it might
raise borrowing costs sooner rather than later to contain
rising prices in Latin America’s biggest economy.

In its quarterly inflation report the bank raised its 2010
inflation outlook to 5.9 percent from 5.0 percent and its 2011
forecast to 5.0 percent from 4.6 percent.

Both those forecasts are well above the center of a
government inflation target, set this year and next at 4.5
percent, plus or minus 2 percentage points.

Deviations of that magnitude from the center of the target
“suggest the need to implement in the short term an adjustment
in the benchmark interest rate” to contain growth imbalances
and reinforce inflation expectations, the central bank said.

The report increases the chances of a rate rise as soon as
the bank’s next meeting, on Jan. 18 and 19, analysts said.

“The bank left it quite explicit that it will likely raise
interest rates in the short term, and I think they gave a clear
signal that it will be in January,” said Silvio Campos Neto,
chief economist with Banco Schahin.

The January meeting will be the first under incoming bank
President Alexandre Tombini. Some analysts had already
speculated that Tombini could raise borrowing costs early in
his tenure to prove his inflation-fighting credentials.

Yields on Brazilian interest rate futures contracts
(0#DIJ:: ) rose in early trading as investors increased their
bets for interest rate hikes in coming months.

The yield on the contract due April 2011 (DIJJ1: ), among the
most highly-traded of the early session, rose to 11.10 percent
from 11.04 percent.

The central bank has held its benchmark interest rate at
10.75 percent for three straight meetings, but analysts in a
weekly survey expect the so-called Selic rate to end 2011 at
12.25 percent.

Nevertheless, incoming president Dilma Rousseff, who takes
office Jan. 1, has emphasized a desire to see lower real
interest rates, or nominal rates minus inflation.

Brazil’s interest rates are among the world’s highest, a
holdover of the days of runaway prices in the 1980s and 1990s.

The central bank held its 2010 economic growth forecast at
7.3 percent and forecast expansion of 4.5 percent in 2011.

Latin America’s largest economy has been a global bright
spot this year, notching robust growth even as many developed
economies continue to struggle.

But the fast expansion, largely on the back of a strong
domestic demand, has stoked fears of price increases.

(Reporting by Vanessa Stelzer and Luciana Lopez; Editing by
Padraic Cassidy)

UPDATE 2-Brazil’s central bank hints at higher lending costs