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Brazil Ready to Increase Interest Rates If Economy Heats Up

Brazil real Afraid of above-target's inflation the Central Bank of Brazil (BC) is ready to act preventively to fight it. The BC forecast growth in 2010 will accelerate to the fastest in three years, triggering high inflation, said Mário Mesquita, the bank's Economic policy director.

"Brazil's inflation has persistently remained above the international average, which suggests that the monetary authority must keep in mind that it's better to prevent than to cure," said Mesquita, anticipating that he is inclined to vote for an increase in interest rates "soon if needed" said Zeina Latif, chief economist at ING Bank in São Paulo.

The central bank in its quarterly report released Tuesday forecast consumer prices will increase 4.6% in 2010 and 2011 from 4.3% this year. At the same time, economic growth will accelerate to 5.8% next year, up from a revised 0.2% expansion this year.

Inflation in Latin America's largest economy will stay below the target of 4.5% in the second and third quarters, suggesting policy makers won't need to raise the benchmark interest rate in the next few months, said Roberto Padovani, chief economist at Banco WestLB Brasil in São Paulo.

"Mesquita signaled that interest rates will need to go up," said Padovani, who expects policy makers to start raising rates in April. "While the risks for inflation are increasing, in the short term inflation will remain tame."

Banco Central do Brasil will increase the benchmark interest rate to 10.75% by the end of next year from a record low of 8.75%, according to a weekly central bank survey of about 100 analysts published earlier this week.

The Central bank kept the Selic rate unchanged at its past three meetings, saying the rate was adequate to fuel a "non-inflationary" economic rebound.

"From the point of view of the balance of risks related to the inflation outlook, the major risk comes from the intensity of the domestic economic activity recovery, which will still be influenced by significant economic policy stimulus," the Central bank report said. "The key factor sustaining economic activity will continue to be domestic demand."



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