Brazil might have to raise interest rates to keep a lid on inflation expectations as economic growth rebounds, the International Monetary Fund said on Friday.
The Brazilian central bank cut rates to a record-low of 7.25 percent on Wednesday and analysts and officials are divided over whether hikes will be needed next year.
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The IMF expects growth to bounce back in 2013 and reach 4 percent, while inflation is forecast at 5.1 percent in 2013, above the 4.5 percent centre of the central bank's target range of 2.5 percent to 6.5 percent.
"As the recovery strengthens, timely unwinding of policy stimulus may be required to anchor inflation expectations more firmly in some countries (e.g., Brazil and Uruguay)," the IMF said in its latest regional report on Latin America.
Brazilian Finance Minister Guido Mantega has said there is no need to raise rates next year.
But a central bank official said in September that it would not hesitate to raise interest rates if inflation were to rise above the 6.5 percent ceiling of the target range.
Inflation was 5.28 percent in September and interest rate futures pricing suggests investors expect a 50-basis-point rate hike in July 2013.
Uruguay raised its benchmark rate to 9 percent last month.
The IMF's latest forecast for Latin America and the Caribbean cut the region's 2012 growth projection to 3.2 percent, citing falling commodity prices and dwindling global demand that hit Brazil the hardest.
The Fund flagged the U.S. "fiscal cliff" of automatic spending cuts and tax increases as a potential threat to the region in 2013, but said it still expected it to grow 3.9 percent on the assumption that the U.S. will change its policy.
"We are confident that a full materialization of the 'fiscal cliff' will not occur," Gian Maria Milesi Ferretti, deputy director of the IMF's Western Hemisphere Department, told a news conference.
Officials also downplayed concerns that the U.S. Federal Reserve's latest round of bond purchases, or quantitative easing known as "QE3", would have a negative impact on other economies, after Mantega complained on Thursday that the policy destabilizes currencies and may have more of a negative than positive impact.
"If those policies have an impact on the probability of the U.S. falling into recession that would be positive for both the U.S. and therefore all other countries. There is no country that would benefit from the U.S. being weak," said Miguel Savastano, another deputy director of the department.
Savastano also said Brazil's weak growth of just 2.7 percent last year, compared to Mexico's 3.9 percent, was not a concern because its medium-term growth potential was still strong.
"If you go back 10 years, when both economies started to have low inflation and stable growth... Brazil has grown 4.5 percent (on average) while Mexico is at 3.5 percent," Savastano said.
"In the short term the cyclical position of Mexico is better than Brazil but over the long term the position is reversed."
(Additional reporting by Krista Hughes: Editing by Neil Fullick)