WRAPUP 1-Brazil inflation falls, chance of smaller rate hike

* Brazil’s IPCA inflation index falls 0.09 pct to mid-July

* Government cuts 2010 inflation to 5.2 pct from 5.5 pct

* Twelve-month inflation slows to 4.74 percent

* Yields on interest rate futures fall across the board

By Luciana Lopez and Vanessa Stelzer

SAO PAULO, July 20 (BestGrowthStock) – Brazil’s government cut its
inflation forecast on Tuesday after consumer prices fell
unexpectedly over the last month, raising bets the central bank
could opt for a smaller interest rate hike this week.

The surprise tumble in prices backs up recent data
suggesting that the economy, which many had recently fretted
was in danger of overheating, is slowing considerably from its
booming pace of the first quarter.

Brazil’s benchmark IPCA inflation index (BRIPCA=ECI: ) fell
0.09 percent in the month to mid-July, compared with a 0.19
percent gain in the month to mid-June, the government’s
statistics agency IBGE said on Tuesday [ID:nN20207934].

Hours later the government cut its 2010 inflation forecast
to 5.2 percent from 5.5 percent, closer to its 4.5 percent
inflation target [ID:nN2096299].

Brazilians suffered through hyper-inflation into the early
1990s and are not accustomed to seeing consumer prices fall.

The slowdown could mean the central bank may decide on a
smaller increase in borrowing costs when it announces a new
lending rate after markets close on Wednesday.

Analysts surveyed by Reuters had expected the IPCA to rise
0.05 percent, with the 17 forecasts ranging from 0.02 percent
to 0.10 percent.

Most analysts still expect policy makers to hike the
benchmark interest rate to 11 percent from 10.25 percent,
according to a Reuters poll. But some maintaining their
forecast said a smaller hike would not be a surprise.

Sixteen of 20 analysts in a Reuters poll said they saw the
central bank raising the Selic rate by 75 basis points, a
slight change from the 18 of 21 analysts forecasting similarly
in a previous poll. The individual analysts in some cases
varied between surveys. [ID:nN20216876]

Investors pared back their expectations more aggressively
on Tuesday.

Yields on Brazilian interest rate futures contracts
(0#DIJ:: ) dropped shortly after the new inflation data, as
investors bet on a smaller rate hike than previously seen.

The yield on the January 2011 (DIJF1: ) contract, the most
actively traded in the early afternoon, slid to 10.98 percent
from 11.05 percent.

The government belatedly increased its 2010 economic growth
forecast to 6.5 percent from 5.5 percent on Tuesday, still
below central bank forecasts of 7.3 percent.

Local media had reported that Finance Minister Guido
Mantega expressed concern to President Luiz Inacio Lula da
Silva late last week over the impact an aggressive rate hike
would have on economic activity.

Other economic indicators, including June inflation, retail
sales and industrial production, have also pointed to a more
moderate pace of economic expansion. That has eased pressure on
the central bank to raise borrowing costs to try to rein in
prices.

Policy makers have so far raised the benchmark Selic rate
to 10.25 percent this year from a record-low 8.75 percent,
putting Brazilian interest rates among the world’s highest.

RATE HIKE STILL LIKELY

A slight rise in the core inflation rate from the month
before, however, supported investor expectations for a rate
hike, even if smaller. Core inflation smoothes out particularly
volatile prices, such as food, which can be dependent on the
weather or other unpredictable factors.

The government does not release core inflation calculations
in the IPCA price reports but analysts often tally those
figures separately.

“Overall, the more structural elements of inflation have
eased back at the margin by more than expected,” Italo Lombardi
of BNP Paribas wrote in a note to clients. “The three different
measures of core the (central bank) monitors are running now at
much lower pace.”

Nevertheless, Brazil’s economy remains stronger than that
of many other countries.

“I think it’s hard for the central bank to decide on a
smaller hike, because indicators such as employment, credit and
household income remain strong,” said Flavia Cattan-Naslausky
of RBS Securities.

But the lower prices “could be an indication that the bank
could stop tightening earlier. In other words, do 75 basis
points now, and then signal a drop in the pace of monetary
tightening,” she said.

For details on Brazilian inflation by sector and regions,
please go to:
http://www.ibge.gov.br/home/presidencia/noticias/noticia_visualiza.php?id_noticia=1670&id_pagina=1

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(Additional reporting by Guillermo Parra-Bernal and James
Matthews; Writing by Raymond Colitt; Editing by Andrew Hay)

WRAPUP 1-Brazil inflation falls, chance of smaller rate hike