UPDATE 3-Brazil central bank sees growth pressuring prices

* Benign inflation outlook in Brazil at risk

* Latin America’s biggest economy in new expansion cycle

* Future policy decisions will adapt to inflation outlook

* Yields on interest rate futures rise after minutes
(Recasts, adds analyst comments, updates prices)

SAO PAULO, June 17 (BestGrowthStock) – Brazil’s central bank struck
a hawkish tone on price pressures and future interest rate
moves on Thursday, cautioning on the risks of a booming

A narrowing output gap and a new expansion cycle could
stoke inflation in Latin America’s largest economy,
policy-makers said in the minutes of last week’s interest
rate-setting meeting.

The pace of future interest rate changes will be based on
how the inflation outlook evolves, they added.

“The minutes, which are quite hawkish, set the (central
bank) up for another 75 (basis point) rate hike at its next
meeting,” wrote Tony Volpon of Nomura Securities in a note to

While inflation has slowed slightly in recent weeks, core
prices, which strip out food and some other volatile items,
have gone up.

“While it is stating the obvious, it’s a timely reminder
that the problem is domestic demand and nothing else,”
said Pedro Tuesta, senior Latin America economist at research
firm 4Cast Inc in Washington.

Last week the central bank raised the country’s benchmark
interest rate, the Selic, by 75 basis points to 10.25 percent
to try to curb speeding inflation. That followed an increase of
the same size in April to 9.5 percent.

Brazil’s economy has seen robust growth since emerging from
a six-month recession last year. The first-quarter
year-over-year growth rate was the strongest since at least
1996, when the country began tracking data in the current

However, that growth has brought with it fears of
inflationary pressure. Twelve-month inflation through May
reached 5.22 percent, slightly slower than the 5.26 percent
through April because of less pressure from food prices, but
far above the government’s target.

Brazil’s Finance Minister Guido Mantega on Thursday said
the economy will grow on average between 6 percent and 6.5
percent for the remainder of 2010.

The central bank’s inflation target for the year is 4.5
percent, plus or minus 2 percentage points.

“Good thing they say that despite the recent fall in food
prices, inflation continues to deteriorate. They’re not being
fooled by the seesaw,” Tuesta said.

Yields on shorter-term Brazilian interest rate futures
contracts (0#DIJ:: ) rose in early trade on Thursday after the
release of the minutes.

The yield on the contract due January 2011 (DIJF1: ) rose to
11.26 percent from 11.20 percent, after jumping as high as
11.29 percent. The yield on the contract due January 2012
(DIJF2: ) rose to 12.18 percent from 12.16 percent after having
risen as high as 12.25 percent.

The contracts were the most actively traded of the early

Yet the central bank also noted factors that could cool
Brazil’s economy in coming months.

Government tax breaks on some consumer goods, such as
household appliances and cars, began expiring in the first
quarter; the euro zone sovereign debt crisis could become a
drag on global economic growth; and tighter interest rates will
slow consumer spending by making credit more expensive.

Already retail sales in April dropped a
bigger-than-expected 3.0 percent from March as shoppers saw
prices on some goods go up after the tax breaks went away.

Industrial production for April also slipped, another sign
of slowing growth.

Local economists expect the Selic rate to reach 11.75
percent by year-end, according to a weekly survey by the
central bank, which next meets to decide on rates on July 20
and 21.

Stock Market Analysis

(Reporting by Elzio Barreto and Todd Benson; Writing by
Luciana Lopez; Editing by Theodore d’Afflisio)

UPDATE 3-Brazil central bank sees growth pressuring prices