Brazil Inflation Unexpectedly Jumps, Ending Downward Trend

Brazil’s inflation unexpectedly accelerated this month, reinforcing investors’ bets that the central bank will soon end a cycle of interest rate cuts that has taken borrowing costs to a record low.

Consumer prices as measured by the IPCA-15 price index rose 0.33 percent in the month through July 13, exceeding all 42 analyst estimates in a Bloomberg survey whose median forecast was for a 0.18 percent increase. The annual inflation rate accelerated for the first time in 10 months to 5.24 percent, the national statistics agency said in Rio de Janeiro today.

Brazil’s central bank has cut the benchmark Selic rate by 450 basis points since August to a record low 8 percent, saying slower global growth will have a disinflationary effect on Latin America’s biggest economy. Traders pared bets that the central bank will cut the key rate to as low as 7.25 percent this year as today’s report showed inflation remains a concern.

“The downward trend has run its course and you’re now going to see inflation hovering above 5 percent,” Newton Rosa, chief economist at SulAmerica Investimentos, said in a phone interview from Sao Paulo. “This is beginning to limit the central bank’s ability to keep cutting.”

One More

Rosa said that today’s inflation report supports his prediction that policy makers led by bank President Alexandre Tombini will stop reducing rates after one more half-point cut at its next meeting in August.

The International Monetary Fund said Brazil’s central bank should be prepared to raise rates by year-end as the effects of monetary easing begin to take hold. The extension of current monetary policy through 2013 would keep inflation “well above the target mid-point,” the IMF said its annual review of Brazil’s economy released today. The bank targets inflation of 4.5 percent plus or minus two percentage points.

Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo, rose 11 basis points to 7.79 percent at 1:52 p.m. local time. The real fell 0.6 percent to 2.0251 per U.S. dollar.

Lower Estimates

Brazil’s economy is recovering more slowly than expected from a contraction in last year’s third quarter. Gross domestic product expanded at a 0.8 percent annualized rate in the first quarter, and economists in the latest central bank survey lowered their 2012 growth estimate for the 10th straight week, to 1.9 percent.

The bank, in the minutes to its July 10-11 meeting released yesterday, signaled it will further reduce borrowing costs while predicting that economic activity will accelerate in the second half of the year. Inflation is on a declining trend and is converging toward the bank’s 4.5 percent target, the bank said.

Analysts in the central bank survey forecast consumer price increases of 4.87 percent in 2012 and 5.5 percent next year.

So far, a series of stimulus measures, including tax cuts on industrial and consumer goods, increased loans from the state development bank BNDES, and lower borrowing costs have failed to spur the economy.

Industrial output dropped for a third straight month in May, while retail sales showed the steepest fall in more than three years and consumer confidence fell in June to its lowest level since September. Some companies, such as carmakers Volvo and Daimler AG (DAI)’s Mercedes-Benz, have ordered layoffs and furloughs to cope with lower demand.

The jump in inflation was largely due to increased food prices associated with droughts in Brazil and abroad, and will not prevent the central bank from further cutting borrowing costs, according to Tony Volpon, head of emerging-markets research for the Americas at Nomura Securities.

Supply Shock?

Adverse weather conditions hurt crops, pushing up food prices 0.88 percent in the month, led by a 29 percent increase in tomato prices. Personal expenses rose 0.92 percent, while transport costs fell for a second straight month as a result of government tax breaks to stimulate the purchase of new vehicles.

“The central bank would see this as a supply shock, which is what weather is,” Volpon said by phone from New York. “It will not change their game plan, but I do think you’re going to see inflation, which was kind of converging to target, begin to rise again.”

Brazil’s Finance Minister Guido Mantega said on July 4 that Brazil’s GDP will grow 3.5 to 4 percent in the six-month period.

The IGP-M index, which is 60 percent weighted in wholesale prices, rose 1.11 percent between June 21 and July 10, the Getulio Vargas Foundation said yesterday. That was more than the forecast of all 18 economists surveyed by Bloomberg, whose median estimate was for a 1 percent rise.

To contact the reporters on this story: David Biller in Boston at dbiller1@bloomberg.net; Andre Soliani in Brasilia at asoliani@bloomberg.net

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

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