Economists see Brazil's central bank holding interest rates through year-end, cementing market expectations policymakers will next week halt a cycle of interest rate hikes that began in April. Local economists cut their forecast for the benchmark Selic rate to 10.75 for 2010, down from 11 percent last week, in a weekly central bank survey.
The central bank last month raised the Selic rate to 10.75 percent from 10.25 percent, surprising economists who had seen an increase of 75 basis points. The change in outlook from economists accompanies cuts in their inflation forecasts for this year and signs of an increasingly dovish stance from the bank. Last week 12-month inflation fell below the center of the government's target for the first time since January. The central bank has this year emphasised its intentions to bring the annual inflation rate to 4.5 percent, although the target includes a band of plus or minus 2 percentage points.
The slower inflation reinforces a call that the central bank "will announce the end of the tightening cycle, standing pat at the September 1 meeting," J. P Morgan analysts wrote in a report.
Brazilian interest rates remain among the world's highest, compared to near-zero levels in several developed economies, due in part to the country's rapid economic recovery.
Economists forecast the IPCA inflation index at 5.10 percent for 2010, compared with 5.19 percent the previous week, the bank said on Monday. Inflation has slowed recently after a spike earlier this year. But at least some of that slowdown comes from seasonal factors that are hard to broaden into wider trends, and not the result of policy choices. The rough weather that pressured food prices earlier this year has eased, and clothing prices are falling now as stores try to move the last of the season's line as they bring in new styles.
Minutes from last month's central bank meeting reinforced dovish signals. Policymakers said the Brazilian economy was moving to a pattern of slower growth with reduced inflation risks.
The bank has now raised the Selic by a total of 2 percentage points this year from 8.75 percent, starting in April. But next year - when a new administration will take power after October elections, making forecasts cloudier - economists see the central bank tightening again. Economists in the survey forecast the Selic at 11.5 percent at the end of 2011, unchanged from the previous week. The economists raised their forecast for 2011 inflation for the first time in 19 weeks, to 4.86 percent from 4.8 percent.