Brazil inflation hits six-year high but rate cut seen

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MEXICO CITYSAO PAULO, Oct 8 (Reuters): Inflation in Brazil climbed further out of the central bank's comfort zone in September but higher prices are not likely to prevent more rate cuts for Latin America's biggest economy or the rest of the region. Brazilian inflation hit an annual rate of 7.31 per cent in September, more than double the rates recorded in Mexico and Chile and the highest since May 2005, data showed Friday. Worries about the global economy will be the main concern of Brazilian policymakers in the months ahead and inevitably push them to lower borrowing costs, analysts said. "Inflation targeting is dead," said Edwin Gutierrez of Aberdeen Asset Management, referring to a central bank policy of tailoring monetary policy to keep a lid on price gains. Brazil's industrial production has struggled this year, with a monthly drop in August among the weak data that might trouble policymakers more than higher prices. "(Inflation) is just not the focus of the central bank," said Gutierrez, who helps manage $7 billion in emerging market debt for the fund. In Chile, consumer prices moved higher but in line with expectations last month, climbing to 3.3 per cent over 12 months while Mexico saw annual inflation slow for the second straight month to 3.14 per cent. But while the inflation picture is mixed across Latin America, analysts said central banks will probably cut interest rates in the near term given the uncertain economic outlook. "(We) see a growing probability that the (Chilean central bank) will start to preemptively ease monetary policy at either the November or December meeting," Goldman Sachs wrote in a regional research note. Of the regional economies, Brazil might have the toughest job of keeping the once-hot economy on track without fanning inflation, the impact of which is being felt in the street. "What I earn is not keeping up with prices," said Antoine Barbosa, a barber in the Brazilian capital of Brasilia. It is the sixth straight month that inflation has overshot the central bank's target range of 4.5 per cent plus or minus 2 percentage points. Despite this, Brazil's central bank surprised markets with an interest rate cut to 12 per cent from 12.5 per cent in August and many analysts expect more easing ahead. "The economic backdrop is quite far from showing a benign scenario for inflation dynamics (but) we believe the Brazilian Central Bank is likely to continue easing monetary policy," said Flavio Serrano, economist with Espirito Santo Investment Bank in Sao Paulo. Brazil is likely to cut rates by 50 basis points both this month and next, Serrano wrote, even as the inflation picture has worsened. The Brazilian central bank has said it expects inflation to moderate and hinted last week at mild rate cuts in coming months by saying that "moderate adjustments" to the (benchmark Selic) rate are consistent with a scenario of inflation converging to the target in 2012. In Mexico, investors are betting that the central bank will cut rates by 25 basis points by January amid a faltering recovery and weakness in the economy of the United States, the country's main trading partner. That benign inflation picture and the risks of a global economic slowdown should push policymakers to stoke the Mexican economy with lower credit costs. Benchmark rates have been unchanged at 4.5 per cent since mid-2009. "We expect the central bank to start to preemptively add monetary stimulus to the economy before the end of the year," Goldman Sachs economist Alberto Ramos wrote in a client note. Chile's central bank is expected to hold its key rate steady at 5.25 per cent in October for a fourth month running.