Rousseff Deepens Brazil Power Cost Cuts as Inflation Accelerates

Brazil will lower energy costs this year more than the government previously announced and made the cuts effective today as part of an effort to slow inflation that has remained above the central bank’s target since August 2010.

“Beyond anticipating the enforcement of the new rates, the cut is bigger than previously announced,” President Dilma Rousseff said in a nationally-televised address yesterday.

The president said the cuts that go into effect today rather than early next month will pare consumers’ power costs 18 percent and those for industry by 32 percent compared to the reductions of 16.2 percent and 28 percent she had announced in September.

Brazilian consumer prices in the month through Jan. 15 rose more than forecast by all economists surveyed by Bloomberg and annual inflation accelerated for the fourth straight month to 6.02 percent, the fastest pace in a year, the national statistics agency reported yesterday.

Price pressures have been building in Brazil as the government stokes demand by reducing taxes and expanding credit amid record low unemployment.

No Rationing Seen

Rousseff has pressured utilities including Eletrobras (ELET6), as the Rio de Janeiro-based company is known, to reduce rates in exchange for the renewal of licenses for an additional 30 years.

Companies such as Cia Energetica de Minas Gerais and Cia Energetica de Sao Paulo refused the offer for believing that their assets were being undervalued and that the proposed rates were not enough to meet the companies’ cash flow needs.

The larger-than-expected tariff cut will bring only temporary relief to inflationary pressure, said Luciano Rostagno, chief strategist at Banco WestLB do Brasil SA.

“The government is using administered prices to control inflation, but it doesn’t solve the numerous bottlenecks the economy faces,” Rostagno said by phone after energy regulator Aneel disclosed the larger cuts prior to Rousseff’s national address. “The inflation dynamics are very unfavorable.”

Rostagno forecasts that annual inflation will dip to 6.14 percent in February from 6.20 percent in January only to accelerate beyond the 6.5 percent upper limit of the central bank’s target in the second quarter. The bank targets annual inflation of 4.5 percent plus or minus two percentage points.

There is also no chance that low reservoir levels at the country’s hydroelectric plants will require the government to impose power rationing, Rousseff said. The start of the rainy season will fill the country’s hydroelectric reservoirs, she said.

‘More Growth, More Production’

The government’s move to lower energy prices is part of a broader effort to improve Brazil’s competitiveness by cutting production costs. Brazil will increase power generation 7 percent in 2013 and will double generating capacity in 15 years, she said.

“This means lower expenses for each of you and for the country’s entire economy. We will reduce costs for the productive sector, which means more growth, more production, more jobs,” Rousseff said. “Brazil will have all the energy it needs to grow in the future.”

At the same time, a contraction in investment and industrial output is complicating Rousseff’s efforts to revive the slowest growth in three years.

The central bank board, led by Alexandre Tombini, on Jan. 16 kept the benchmark interest rate at 7.25 percent for the second straight meeting, saying that risks for inflation had worsened in the short term and that economic recovery was less intense than expected.

The economy expanded an estimated 1 percent last year, according to the central bank, down from 2.7 percent in 2011 and 7.5 percent in 2010.

To contact the reporter on this story: Raymond Colitt in Brasilia Newsroom at rcolitt@bloomberg.net

To contact the editor responsible for this story: Andre Soliani at asoliani@bloomberg.net

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