Brazil cenbank comfortable with inflation outlook-WRAPUP 2

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Friday September 10, 2010 05:35:19 PM GMT

* Central bank sees policy tools gaining efficiency

* Reinforces view rates will remain steady for a while

* Twelve-month inflation slightly below center of target (Updates with factory capacity numbers)

By Guillermo Parra-Bernal and Elzio Barreto

SAO PAULO, Sept 9 (Reuters) - Brazil's central bank said on Thursday it was comfortable with the inflation scenario for the coming months as slower-than-expected inflation data reinforced the view that Latin America's largest economy was growing at a sustainable pace.

Central bank policymakers said in minutes from last week's monetary policy meeting that they saw reduced risks to benign inflation numbers in the country as a decelerating global economy and the end of fiscal and monetary stimuli at home help put a lid on potential price increases.

The comments along with data showing inflation accelerated by half the amount expected by analysts in a Reuters poll sent yields on interest rate futures <0#DIJ:> tumbling.

Investors pared back expectations the central bank would have to raise borrowing costs early next year, fueled by concerns rapid economic growth could feed demand for goods and services and inflate prices.

The bank also said investors were overestimating the level of interest rates needed to fight inflation. Brazil's economy was headed towards a lower neutral interest rate -- the rate at which an economy can grow without fueling inflation, thanks to stronger economic fundamentals, the bank said.

"The central bank's message from the last minutes is quite straightforward: it has no intention whatsoever of hiking rates any time soon," said Alexandre Schwartsman, chief Brazil economist with Banco Santander in Sao Paulo.

Data on Thursday showed the benchmark IPCA consumer price index <BRCPI=ECI> rose 0.04 percent in August -- slightly more than the 0.01 percent gain in July but below expectations for 0.08 percent increase in a Reuters poll. For details see [ID:nN09172531].

Meanwhile 12-month inflation came in slightly below the center of the target, lending support to the central bank's decision this month to keep interest rates steady at 10.75 percent and put an end to a 200-basis-point tightening cycle.

Twelve-month inflation slowed to 4.49 percent in August, below the center of the government's 2010 target of 4.5 percent, plus or minus 2 percentage points, from 4.6 percent in the year to July.

Other data on Thursday also showed economic activity was losing momentum. The National Industry Confederation, an industry group for the manufacturing sector, said the factory capacity utilization rate <BRFCI=ECI> fell to 82.3 percent in July from 82.5 percent in June.

STRONG GROWTH READINGS

The minutes come as data last week showed Brazil's economy grew at a rapid 8.8 percent annualized rate in the second quarter, but inflation expectations and price pressures have remained contained.

The "advanced maturing stage" of Brazil's inflation-targeting regime is giving policymakers enough leeway to act prudently and not overreact in order to keep inflation under control, policymakers also said in the minutes.

Against this backdrop, the central bank saw inflation in the country more likely to converge on the mid-point of the bank's target at 4.5 percent, despite some risks that include rising wages and factory capacity strains.

"In spite of the recognition that there are risks to an increase in the inflation rate in the short term, the Copom (central bank monetary policy committee) reckons that a trend in which prices will converge to the mid-point of the target will come into effect," the minutes said.

The central bank did however say that if this does not materialize it could adjust monetary policy.

Analysts said the central bank was being so emphatic on a benign inflation outlook in order to manage market expectations and get them to converge with its own scenario.

The risk with this attitude is that the bank can be caught off guard more easily in case of financial shocks, Banco Santander said.

"We note that there is possibly more uncertainty about coming developments than the monetary policy committee's assertiveness ultimately acknowledges," Schwartsman said. "Enjoy the party, but stay close to the door." (Writing and additional reporting by Ana Nicolaci da Costa; Editing by James Dalgleish)

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