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Brazil's central bank said its inflation forecast for this year is 'markedly' above the 4.5 per cent target and board members meeting last week agreed on the need to raise rates. Yields of shorter dated interest rate futures rose.

Bloomberg reported on Thursday, that policy makers kept the overnight at a record low 8.75 per cent last week for a fifth straight meeting, arguing it was prudent to wait for more data before starting to raise rates, the minutes of their March 16-17 meeting published today on the bank's Website show.

The decision to keep the benchmark rate unchanged, which surprised 30 of 57 analysts surveyed by Bloomberg, sparked the biggest split vote among board members in 14 months. Three of the eight directors voted to raise the rate to 9.25 per cent to rein in inflation that has been above target since January.

'There was consensus among the committee members over the need to implement an adjustment to the benchmark interest rate to contain the mismatch between the domestic demand expansion pace and the output capacity of the economy,' policy makers said in the minutes.

The yield on the interest rate future contract due January 2011, the most traded on the Sao Paulo BM&F exchange, rose three basis points to 10.35 per cent. The yields on all contracts maturing between June 2010 and July 2011 rose.

Consumer prices rose 5.09 per cent in the 12 months through mid-March, the highest rate in 10 months, the national statistic agency said March 23. The annual inflation rate will end 2010 at 5.1 per cent, according to the median forecast in a central bank survey published March 22.

The central bank's outlook for 2011 inflation has also risen since its last policy meeting in January and now also stands above the midpoint of the target range, which incorporates leeway of plus or minus two percentage points.

'The Banco Central do Brasil went to great lengths to telegraph a rate hike at its next meeting in April,' Nick Chamie, head of emerging-markets research at RBC Capital Markets Inc. in Toronto, wrote in a report on Thursday.

Chamie expects the Selic will be lifted to 9.25 per cent at the April 27-28 meeting.

Policy makers at the monetary policy committee, known as the Copom, said they decided to pause again last week to better gauge the effect on domestic demand of steps taken in 2010 year to unwind last year's stimulus, Zeina Latif, ING Bank NV's chief economist in Sao Paulo, said in a phone interview.

The central bank on February 25 raised by $39.6bn the amount that banks must keep on deposit with the central bank. Central bank President Henrique Meirelles on March 15 said the move would impact monetary policy.

Latif was among the 30 analysts who expected the central bank to raise rates last week.

On the minutes, policy makers said that any deviation in inflation from target needs to be 'promptly corrected.'

'Unless the meaning of 'promptly' has changed, it is hard not to conclude that the entire reasoning of the minutes suggested that the Copom would have hiked rates last week', Alexandre Schwartsman, chief economist at Banco Santander SA in Sao Paulo and a former central bank board member, wrote in a note to clients. 'In fact, if everyone thought that a tightening cycle is an imperative, the difficulties lie in understanding why the majority decided to wait.'

In a separate report released today by the national statistic agency, the unemployment rate rose to 7.4 per cent in February, compared with 7.2 per cent in January. The jobless rate was lower than the median estimate for 7.6 per cent unemployment rate in a Bloomberg survey of 33 economists.