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FIMALAC : Fitch Maintains 3.2% Brazil Growth Forecast, Sees Inflation Risk

03/28/2012 | 01:30pm US/Eastern

Fitch Ratings on Wednesday kept its 2012 economic-growth forecast for Brazil steady at 3.2%, slightly higher than the country's actual 2011 growth of 2.7%, but it warned of inflation risks from policies aimed at stimulating the economy.

"The slight recovery is underpinned by the easing of monetary policy and macro-prudential measures that were taken previously to rein in credit growth," Fitch said in a report.

Brazil's government in recent months has reduced the country's Selic base interest rate to 9.75% from its 2011 peak of 12.5% while cutting taxes on selected consumer goods and loosening restrictions on consumer credit. The government also ordered a 14% increase in the minimum salary to 622 Brazilian reais ($342) per month.

Such policies, however, could rekindle inflation in Brazil, Fitch warned.

"Fitch expects the end-2012 inflation rate to remain above the middle point of the target range," the report said.

Brazil's government is committed to a 2012 inflation rate of 4.5%, but with a two-percentage-point tolerance, meaning that inflation could weigh in at 6.5% and still be in compliance with the country's inflation-targeting program.

Currently, inflation is running at 5.6%, down from calendar-year inflation of 6.5% in 2011 but still well above the 4.5% target.

Added Fitch: "High services inflation, backward-indexation of certain prices as well as the historically low unemployment rate prevents a faster disinflation."

Brazil's unemployment rate fell to its lowest level ever in December at 4.7%. In February, unemployment rose to 5.7% but economists said the increase was due to seasonal factors only.

Fitch said there were also some downside risks to growth in 2012. These include "an unfavorable external environment, softer growth in China, volatility in commodity prices and a possible spike in investor risk aversion."

-By Tom Murphy, Dow Jones Newswires; 55-11-3544-7090; brazil@dowjones.com

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