Jan. 21 (Bloomberg) -- Brazil's benchmark lending rate may fall to a 10-year low of 13 percent by yearend as the central bank today prepares its first of at least three cuts this year, said ABN Amro Bank NV economist Mario Mesquita, the most accurate of two dozen economists surveyed by Bloomberg in 2003.

Mesquita said he expects policy makers today to cut the overnight target rate 0.5 percentage point, the smallest reduction since June, to 16 percent to boost growth in South America's largest economy.

``The central bank has to continue easing monetary policy with responsibility,'' said Mesquita, a 38-year-old Rio de Janeiro native who joined ABN Amro in Sao Paulo in 2000 after working as an economist at the International Monetary Fund for three years. ``They must stay on a conservative path.''

Mesquita, ABN Amro's head Brazil economist, predicted the central bank's two rate rises last year -- in January and February -- to a four-year high of 26.5 percent. The central bank then cut rates seven times starting in June as the inflation rate fell. His assessments were more accurate than the 23 other economists who participated in a majority of Bloomberg surveys last year.

The central bank has been lowering the benchmark lending rate to help bolster growth after the economy contracted in both the second and third quarters last year. The government forecasts the economy grew less than 1 percent in 2003, while a central bank survey of economists last week predicted Brazil's economy probably grew less than 0.1 percent, the slowest pace of growth since 1992.

Boosting Demand

Cutting the overnight target rate to 13 percent, the lowest in Brazil since the government created a new currency, the real, in 1994, would help manufacturers such as France's Alstom SA by lowering borrowing costs and boosting demand. Jose Luiz Alqueres, chief executive officer for Alstom's local unit, said he wants the central bank to accelerate rate cuts to spur demand for the company's power turbines and other products.

``I hope this time the central bank is less conservative and more daring,'' Alqueres said in an a televised interview with Bloomberg News. He said Alstom may have to fire 200 workers in the country this year because of a decline in orders.

At the same time, lower rates hurt banks such as Banco Bradesco SA, the country's biggest non-government bank, by reducing income from government bonds and loans, said analysts such as Carlos Albano of Uniao de Bancos Brasileiros SA.

Banks

Albano said the decline in rates has driven Bradesco and other banks to buy rivals and add customers. Bradesco bought Banco Zogbi, a consumer finance company, in November; and HSBC Holdings Plc bought Lloyds TSB Group Plc's Brazilian business, including its consumer finance unit Losango.

A benchmark rate of 13 percent is as low as policy makers can cut without rekindling an inflation surge that prompted them to push up lending rates early last year, Mesquita said.

The annual inflation rate has fallen to 9.3 percent from a seven-year high of 17.2 percent in May as President Luiz Inacio Lula da Silva's spending cuts fueled a rebound in the currency that has driven down import prices. The government has set a yearend inflation rate target this year of 5.5 percent.

``The central bank can't lower the key rate too much because real interest rates must be compatible with the government's need to refinance public debt,'' Roberto Troster, chief economist of Brazil's banking association, said at a luncheon with journalists in Brasilia yesterday. ``Brazil's not accustomed yet to inflation adjusted rates below 8 percent.''

A 13 percent level would allow the central bank to prevent growth in demand from outpacing growth in supply and investments, Mesquita said.

`Overheat'

``That level is one that balances the calls for low borrowing costs with the risks that the economy may overheat,'' said Mesquita, who forecasts economic growth of 4 percent this year, above the government's 3.5 percent forecast.

The real gained 22 percent last year, reversing much of the 35 percent tumble in 2002, and is up 1.8 percent this year to 2.8415 reais to the dollar. Brazil's currency fell 0.3 percent to 2.8455 per dollar at 1:28 p.m. in New York.

The median forecast of 33 economists surveyed by Bloomberg for today's central bank meeting is for a 0.5 percentage point cut. Policy makers will announce their decision after 5 p.m. in Brasilia (2 p.m. in New York).

Rising Inflation

The rise in the monthly inflation rate in December to 0.52 percent, from 0.34 percent in November, and expectations that consumer prices are rising faster this month, will probably ensure central bankers are cautious in cutting rates, Mesquita said.

``The central bank has to meet the inflation target,'' said Mesquita, who earned his masters degree at the Rio de Janeiro-based Catholic University, where two former central bank presidents, Arminio Fraga and Gustavo Franco, studied and have taught. ``If they do not meet the target, the damage to the central bank's credibility would be bigger than in previous years, when we had crises.''

Central bankers will probably follow up a reduction today with two more in the first half of the year, getting in most of this year's cuts before he expects the Federal Reserve to start raising its benchmark rate in the U.S., Mesquita said.

Last Updated: January 21, 2004 13:30 EST