Brazil Central Bank Says Inflation High as Bond Bids Spurned

Brazil’s inflation is at a high level that requires attention, the central bank said in response to a report showing that consumer prices rose in January at the fastest pace in almost eight years. The real posted the biggest gain among major currencies.

The 12-month inflation rate, which reached 6.15 percent in January, will hover around 6 percent until June before slowing, the central bank said. The exchange rate, smaller wage increases, a drop in rental prices and slower credit growth will ease consumer price increases in 2013 from 2012, according to the bank. Brazil targets inflation of 4.5 percent.

Central bank President Alexandre Tombini is trying to convince investors that inflation, running above target for 29 months, will remain under control after he cut the benchmark interest rate to a record. The real today gained as much as 1.5 percent against the U.S. dollar on speculation policymakers will allow the exchange rate to appreciate to help tame inflation instead of increasing interest rates.

“We are going to see the central bank continuing to use the spot currency as its main monetary policy tool for the moment,” Nick Chamie, global head of currency strategy and emerging markets research at RBC Capital Markets, said in a telephone interview from Toronto. Today’s comment “reflects their desire to anchor inflation expectations.”

Biggest Rally

The real today appreciated 1.2 percent, the most among 16 major currencies tracked by Bloomberg, to 1.9672 per U.S. dollar at 5:19 p.m. local time. Swap rates on the contract expiring in January 2014, the most traded in Sao Paulo today, gained nine basis points, or 0.09 percentage point, to 7.44 percent.

Following the surge in swap rates earlier today, the Treasury rejected all bids in its auction of LTN bonds due in April 2014, April 2015 and July 2016. It sold 5.5 billion reais ($2.8 billion) of floating-rate LFT bonds due in 2018.

Consumer prices as measured by the benchmark IPCA index rose 0.86 percent in January, a government report showed today. The median estimate from 41 economists surveyed by Bloomberg was for a 0.83 percent rise. Annual inflation accelerated to 6.15 percent from 5.84 percent the previous month.

President Dilma Rousseff’s administration has cut taxes and borrowing costs to jumpstart growth that in 2012 was slower than any other major Latin American economy, and the stimulus has helped keep inflation above the central bank’s target since August 2010. After reducing the Selic rate by 525 basis points to a record 7.25 percent, policy makers kept borrowing costs unchanged at the last two meetings in a bid to prevent inflation from further quickening.

Growth Forecast

Economists surveyed by the central bank forecast growth of 3.1 percent in 2013, with inflation of 5.68 percent. The bank estimates the economy grew 1 percent last year, decelerating from 2.7 percent in 2011 and 7.5 percent in 2010.

Today’s statement by the central bank followed an interview Tombini gave O Globo newspaper, in which he said inflation was at an uncomfortable level. The board’s statement was delivered by telephone from Brasilia.

In the minutes of its January meeting, the central bank reiterated a plan to keep borrowing costs at a record low for prolonged period of time given the economy was recovering at a slower-than-expected pace.

Tame Inflation

Policy makers will rely on a stronger currency, which reduces the costs of imports, and tax cuts to tame inflation as it seeks to delay a rate increase that could slow growth, said Neil Shearing, chief emerging markets economist at Capital Economics Ltd.

Brazil plans to scrap federal taxes on food staples as it seeks to slow price increases, Rousseff said earlier this week. The move, together with cuts to energy rates, will slow inflation, the central bank said.

“We need to see a further deterioration in the inflation outlook” before the central bank decides to raise rates, Shearing said in a phone interview from London.

Food and beverages represented 23.9 percent of family budgets in 2012, and were the second-largest source of inflation after personal expenses. Food prices rose 1.99 percent in January.

To contact the reporters on this story: Matthew Malinowski in Brasilia at mmalinowski@bloomberg.net; David Biller in Rio de Janeiro at dbiller1@bloomberg.net

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

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