Salient to Investors:

Roberto Padovani at Votorantim CTVM said services inflation will keep running at close to 8 percent for the coming year, but sees the economy moving above capacity by the end of 2013, triggering a rate hike in 2013. Brasil will reduce electricity rates in 2013, which will have a deflationary impact of 35 to 50 basis points.

Ilan Goldfajn at Itau Unibanco and Marcelo Salomon at Barclays expect the central bank to make two 50 basis-point cuts in half1 of 2013, even as price increases run faster than the central bank’s target. Goldfajn said the slowdown in food prices and decline in agricultural prices have run their course, and he reduced his estimate of GDP in 2013 to 3.2 percent from 4 percent. Salomon said inflation will hover around 5.5 percent or more, but still below the upper bound of the target.

Tony Volpon at Nomura said lower rates would merely feed higher inflation with little positive impact on growth, and add to the mess that will ultimately have to be cleaned up later on in the year.

Brazil will grow 3.7 percent in 2013, following 1.27 percent growth this year, according to the latest central bank survey of about 100 economists. The economists are expecting inflation of 5.4 percent next year. Finance Minister Guido Mantega forecasts growth of 4 percent next year.

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