WRAPUP 3-Brazil seen holding rates despite rising prices

* Central bank expected to hold Selic rate at 10.75 pct

* Above forecast inflation to mid-Oct could add pressure

* Rate verdict comes ahead of Oct. 31 election runoff
(Updates with economic activity data)

By Ana Nicolaci da Costa

BRASILIA, Oct 20 (BestGrowthStock) – Brazil’s central bank is
expected to hold interest rates steady on Wednesday for a
second consecutive meeting even as inflation in Latin America’s
largest economy gains steam.

Policymakers will keep the Selic rate (BRCBMP=ECI: ) at 10.75
percent after putting an end in September to a 200-basis-point
cycle of monetary tightening that began in April, according to
a Reuters survey. [ID:nSPG003089]

Brazil, which is battling a surge in its currency against
the dollar, is holding monetary policy steady even as its
economy expands robustly and other big emerging markets such as
China and India have begun raising interest rates.

All 20 analysts polled by Reuters expect the central bank
to keep the Selic rate on hold through the end of the year.

The central bank has reiterated that the outlook for
inflation remains benign, but has kept the door open for an
eventual rate hike if a rise in food prices spreads to the rest
of the economy. [ID:nN30242360]

While price pressures picked up pace early in October,
12-month inflation is still hovering around the central bank’s
forecast of 5 percent.

Data on Wednesday, however, showed inflation for the month
through mid-October rose a larger-than-expected 0.62 percent.
That could add pressure on policymakers to raise rates in the
future. [ID:nN20187750]

“The central bank has given very dovish signs recently so I
do not believe that this number today will alone make any
difference for today’s rate decision,” said Marcelo Carvalho,
chief Latin American economist at BNP Paribas in Sao Paulo.

But he said the central bank should do something to tackle
“significant” price pressures.

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Graphic on the Selic rate: http://link.reuters.com/pup68k

Factbox on political risks in Brazil: [ID:nRISKBR]

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Brazil’s interest rates are among the highest in the
world and have attracted heavy inflows of capital from
lower-yielding economies. This has helped push the currency to
two-year highs and the government has adopted a series of
measures to contain the rise. [ID:nN18280200]

Carvalho said that Brazil would to some extent have to
choose between a stronger currency and higher interest rates if
it wants to contain inflation. A weaker real would increase the
need for tighter monetary policy as an inflation-fighting
tool.

“This decision by China could be a lesson for countries
like Brazil,” he said.

China unexpectedly decided on Tuesday to raise interest
rates for the first time in nearly three years. See
[ID:nSGE69I0HU]

TIMING

If the bank leaves rates on hold as expected, it would be
good news for Dilma Rousseff, the ruling party candidate and
frontrunner in the Oct. 31 presidential runoff vote.

Rousseff’s lead over opposition candidate Jose Serra has
narrowed sharply since she failed to snatch a victory in the
first round of Oct. 3 voting, and she has struggled to revive
her campaign since.

Some investors fear the central bank may be waiting too
long to raise interest rates amid signs that price pressures
and inflation expectations are increasing.

Brazil has outshone most other major economies this year,
as booming labor and credit markets fueled domestic demand.
Economic activity was unchanged in August from the previous
month, but was up 6.43 percent compared to August 2009,
according to central bank data. [ID:nN20193696].

Analysts expect the economy will grow 7.55 percent in
2010.

The IPCA consumer price index rose 5.03 percent in the 12
months to mid-October, up sharply from the 4.57 percent rate in
the year through mid-September and above the midpoint of the
government’s year-end target of 4.5 percent, plus or minus 2
percentage points.

The central bank uses the index as a guide when setting
interest rates.

Analysts in a weekly central bank survey on Monday raised
estimates for 2010 inflation for the fifth week running,
betting the IPCA would close the year at 5.2 percent.

“We continue to think that (the central bank) is wrong in
its outlook and that it is necessary to resume monetary
tightening to bring the interest rate to its neutral rate and
to guarantee inflation at the center of the target next year,”
said Bernardo Wjuniski, analyst at Tendencias consultancy in
Sao Paulo.
(Additional reporting by Elzio Barreto in Sao Paulo, Editing
by Stuart Grudgings and Padraic Cassidy)

WRAPUP 3-Brazil seen holding rates despite rising prices