Brazil’s central bank lowered its forecast for price increases in 2013, insisting that a recovery in economic growth and a record-low interest rates won’t compromise its goal of bringing inflation back to target.
Policy makers, in their quarterly inflation report today, said inflation will slow to 4.8 percent in 2013, according to its reference scenario where the benchmark rate stays at its current 7.25 percent. In September, the bank said prices would rise 4.9 percent next year. Analysts surveyed by the bank are less optimistic, forecasting prices will jump 5.42 percent in 2013 as the Selic rate stays at record low levels.
President Dilma Rousseff has stepped up efforts to spur growth even as inflation is forecast to remain above the bank’s 4.5 percent target for a third year in 2013. Policy makers last month ended a yearlong easing cycle that saw interest rates fall more than any Group of 20 nation amid signs that still-strong domestic demand and a weakening currency could fuel a rebound in inflation once the stimulus works its way through the economy.
“We are expecting growth rates that will not cause unbalance in the economy, particularly in terms of inflation,” the central bank’s director for economic policy, Carlos Hamilton, told reporters in Brasilia today.
Yesterday’s announcement that Petroleo Brasileiro SA (PETR4) will raise gasoline prices next year will make it more difficult for policy makers to fight inflation, said Jose Francisco de Lima Goncalves, chief economist at Banco Fator SA.
“Seeing inflation slow below 5 percent is tough,” Goncalves said in a telephone interview from Sao Paulo.
Brazil’s central bank may update its inflation scenarios when gasoline prices go up, Hamilton said. There is still a possibility that inflation could slow to the bank’s target next year, Hamilton added.
Policy makers, in today’s report, repeated bank President Alexandre Tombini’s commitment to keep monetary conditions stable for a “prolonged” period, saying it’s the most-adequate strategy for guaranteeing inflation falls to target amid a challenging global economic outlook. Pressures on food and beverage prices, which rose 10 percent over the past year due to bad weather, are beginning to ease, the bank said.
Fiscal expansion and a weaker exchange rate also fueled 2012 inflation, Hamilton said. Brazil’s real is more stable now than in the past 12-15 months, and the central bank sees an exchange rate of 2.05 reais per dollar as a more “adequate” scenario for its economic forecasts, Hamilton added.
The bank said today that it sees the economy expanding 1 percent this year and 3.3 percent in the year through the third quarter of 2013. Prices will rise 4.9 percent in 2014, according to its reference scenario. In the so-called market scenario, prices will rise 4.9 percent next year and 4.8 percent in 2014.
Authorities said yesterday they will extend tax breaks on the purchase of cars and home appliances set to expire this year to drive demand while avoiding price increases.
Since August 2011, the government has also lowered bank reserve requirements and announced plans to lure billions of reais in infrastructure investments.
Still, the world’s second-largest emerging market expanded 0.6 percent in the third quarter, half the pace forecast by economists, as investment shrank for a fifth straight quarter. Analysts surveyed weekly by the central bank have reduced both 2012 and 2013 growth forecasts five weeks in a row, to 1 percent and 3.4 percent, respectively.
More recent statistics indicate that Brazil’s economic slump may be bottoming-out.
Consumer default rates in November fell for the first time in five months, while the central bank’s economic activity index, a proxy for gross domestic product, rebounded more than analysts forecast in October. The government said last week that retail sales in October grew at the fastest pace since July, driving the stock of consumer goods maker Hypermarcas (HYPE3) to near a two-month high and online retailer B2W (BTOW3) to an 18-month high.
The pace of inflation has continued to increase even as Brazil’s economic recovery remains unbalanced. Consumer prices as measured by the IPCA-15 index jumped 0.69 percent in the month through mid-December, the most in 19 months, while inflation accelerated to 5.78 percent. Inflation is the central bank’s “biggest daily concern,” Tombini said Dec. 11.
A policy concern is the real, which has weakened 9.5 percent this year, more than any major currency tracked by Bloomberg. The central bank in recent days has stepped up efforts to slow the currency’s slide by easing reserve requirements on bets against the dollar and loosening capital controls to attract more foreign investment.
Swap rates on the contract due in January 2014, the most traded in Sao Paulo today, rose three basis points to 7.11 at 2:43 p.m. local time. The real rose 0.5 percent to 2.0617 per U.S. dollar.