By Silvio Cascione
SAO PAULO, April 8 (Reuters) - Brazil's inflation probably breached the central bank's target ceiling in March for the first time in over a year, which could strengthen calls for an interest rate hike in spite of a fragile economic recovery, a Reuters poll showed on Monday.
Brazil's benchmark IPCA consumer price index likely rose 6.62 percent in the 12 months through March, up from 6.31 percent in February, according to the median forecast of 21 banks and research firms surveyed by Reuters.
That would be the fastest increase in consumer prices since November 2011. The central bank, which meets next week to decide on its benchmark interest rate, targets inflation at 4.5 percent, with a tolerance margin of plus or minus two points.
The monthly inflation rate probably slowed a tad to 0.50 percent from 0.60 percent in February. However, food prices likely posted another sharp increase even after President Dilma Rousseff's government slashed taxes on food staples, in a sign that efforts to control inflation by cutting taxes and freezing some prices have had limited effects.
The recent spike in consumer prices has caught the central bank by surprise. Six months ago, policymakers were much more worried about Brazil's sluggish growth than about prices and were about to cut interest rates for a tenth straight time to a record low of 7.25 percent. By then, they estimated inflation would be at 5.2 percent currently.
Now, economists expect policymakers to raise interest rates to 8.50 percent later this year, according to the median forecast in a central bank poll. Most believe the bank will wait until at least May to start hiking lending costs, but some think it could increase the so-called Selic rate as soon as next week.
'Although it seems cruel to raise interest rates with such moderate growth, this appears to be the most likely decision,' wrote analysts at J. Safra bank, led by Carlos Kawall. 'Inflation is becoming an obstacle in itself to the recovery.'
Brazil is expected to grow 3 percent this year, according to the median market forecast in the central bank poll. Most of the recent growth has been due to strong consumer demand, while investments have remained weak amid heavy government intervention in several sectors, such as infrastructure.
Many economists have said that one of the most worrisome aspects of the recent inflation rise was the so-called diffusion index, which measures the proportion of sectors with price increases. Analysts at Citigroup led by Marcelo Kfoury wrote that this measure will probably remain high, 'pointing to widespread upward pressures in the economy.'
Inflation is expected to moderate later this year to 5.7 percent, but it should not drop back to the center of the target at 4.5 percent anytime soon, according to the central bank poll.
Forecasts for the monthly rate ranged from 0.45 to 0.54 percent, and annual estimates varied from 6.57 to 6.70 percent.
(Reporting by Silvio Cascione; Editing by Chizu Nomiyama) Keywords: BRAZIL ECONOMY/INFLATION
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