Brazil's Consumer Prices Rose Faster-Than-Expected, Pushing Yields Higher

Brazilian inflation quickened more than expected through mid-September, boosting expectations that the central bank will raise interest rates in the first half of 2011. Yields rose.

Consumer prices as measured by the IPCA-15 index increased 0.31 percent through mid-September, the statistics agency said. Economists surveyed by Bloomberg expected prices to rise 0.24 percent from mid-August, according to the median forecast of 35 analysts. The index fell in July and August.

Economists surveyed weekly by the central bank have pushed up their 2010 and 2011 inflation forecasts this month on expectations that rising global commodity prices coupled with sustained domestic demand will pressure consumer prices. Food prices, which rose for the first time since May, were behind the greater-than-expected rise of the headline figure, said Andre Perfeito, an economist at Gradual Investimentos.

“If this move continues, the central bank will be called to manage expectations,” said Perfeito in a phone interview. “The bank may either act now, leaving room for rate cuts for the next government, or do nothing and leave it to the next board the chance to show their commitment to fight inflation.”

In the overnight interest-rate futures market, the yield on the contract due in January 2012, the second-most traded on Sao Paulo’s BM&F exchange, rose three basis points to 11.54 percent after rising as much as six basis points earlier. The real rose 0.2 percent to 1.7291 per dollar at 11:03 a.m. New York time.

Expectations

Policy makers on Sept. 1 kept interest rates unchanged at 10.75 percent, after raising the Selic a total of 2 percentage points at their previous three meetings to prevent Latin America’s biggest economy from overheating.

Analysts in a weekly central bank survey forecast rate increases will resume in March, and the Selic will rise to 11.75 percent by June.

Food prices, led by a 3.4 percent increase in meat prices, jumped 0.3 percent through mid-September, after falling 0.8 percent and 0.68 percent in the two previous IPCA-15 readings. Dry weather in Brazil’s crop producing region is pressuring food prices, Perfeito said.

Annual inflation accelerated to 4.57 percent, above the bank’s 4.5 percent target, the report said.

Policy makers will need to raise the benchmark rate by 1.5 percentage point in the first half of 2010 to deliver inflation on target next year, Perfeito said.

Inflation expectations are rising in Brazil. Analysts expect consumer prices to rise 4.95 percent in 2011, up from a week earlier forecast of 4.90 percent, according to the median forecast in the central bank survey of about 100 economists published yesterday.

Economists also raised their 2010 inflation forecast to 5.01 percent, from 4.97 percent a week earlier.

A strong labor market and steady real income growth “should contribute to keep inflation projections rising in the short term,” Flavio Serrano, senior economist at Banco Espirito Santo de Investimento, wrote in a note to clients.

To be sure, the global economic recovery and the real’s appreciation may help contain prices in Brazil, leading policy makers to adopt a wait-and-see stance to monitor how inflation reacts, Perfeito said.

To contact the reporter on this story: Matthew Bristow in Brasilia at mbristow5@bloomberg.net Iuri Dantas in Brasilia at idantas@bloomberg.net

To contact the editors responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net

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