Brazil March Inflation 0.47%, Lower Than Economist Consensus

Brazilian consumer prices rose less than economists forecast in March, while the annual rate exceeded the top of the central bank’s target range for the first time since November 2011. Swap rates fell.

Prices as measured by the benchmark IPCA index climbed 0.47 percent in the month, the national statistics agency said today in Rio de Janeiro. The median estimate of 38 economists surveyed by Bloomberg was for a 0.50 percent increase. Inflation accelerated to 6.59 percent in the 12 months through March from 6.31 percent in February.

Brazil’s central bank has held its benchmark lending rate at a record low 7.25 percent since October, even as the inflation rate has risen every month since July. Besides lowering interest rates, President Dilma Rousseff’s administration has enacted dozens of stimulus measures to revive an economy that in 2012 posted its second-worst performance in 13 years. Inflation exceeding the target range adds pressure on the bank to reverse course and boost rates, according to Luciano Rostagno, chief strategist at Banco WestLB do Brasil SA.

The central bank “will wait until May to see how the economy performs in the first quarter before beginning a tightening cycle,” Rostagno said by telephone from Sao Paulo. “Inflation figures in Brazil were not as bad as the market expected, but still suggest that inflation continues in an upward trend.”

Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo today, fell two basis points, or 0.02 percentage point, to 7.86 percent as of 1:36 p.m. local time. The real strengthened 0.2 percent to 1.9778 per U.S. dollar.

Target Range

The central bank targets inflation of 4.5 percent, plus or minus two percentage points. Annualized price increases have run faster than the midpoint of the target range since September, 2010.

Inflation would have been slower in March had it not been for food prices, “the main villain,” and other seasonal pressures, Finance Minister Guido Mantega told reporters in Brasilia. Food and beverage prices led increases in March, rising 1.14 percent, the statistics agency said.

“The government will not spare measures to contain inflation and prevent it from spreading,” Mantega said.

Augusto Mello, the owner of Nello’s Cantina, one of Sao Paulo’s traditional Italian restaurants, last month began curtailing his tomato purchases to protest a tripling in prices for the vegetable over the past year to 150 reais ($75) for a 20-kilogram crate. A sign on the entrance of the 38-year-old restaurant urges patrons to become “conscientious consumers” and help fight inflation by ordering dishes without red sauce.

Gaining Momentum

“What is becoming clear not only for the markets but for society and even the political world is that inflation is really getting a momentum of its own,” Carlos Kawall, chief economist at Banco J. Safra SA, said on April 9. “More and more, people talk about it.”

Brazil will hold presidential elections in October 2014.

Kawall said pressure is mounting for the central bank to raise rates, and forecasts a 25-basis-point increase to the Selic rate at the meeting next week as the first step in a 150- basis-point tightening cycle this year.

The bank on March 28 released its quarterly inflation report, in which it said that even under a scenario in which the benchmark rate were raised to 8 percent this year, there would be a 25 percent chance of inflation exceeding 6.5 percent. In all of its scenarios, annual inflation will remain above the 4.5 percent midpoint of the target range until the first quarter of 2015.

Diffusion Index

While the diffusion index, which indicates how widespread price increases are in different sectors of the economy, declined to 69 percent from 72 percent, 12-month core inflation continued to accelerate, said Priscila Godoy, an economist at Rosenberg Consultores Associados.

“We have a very worrisome situation,” Godoy said in a telephone interview from Sao Paulo. “The bank has to react as soon as possible so the cycle of rate increases doesn’t have to be excessive.”

Core inflation, excluding government-set prices and household food purchases, slowed to 0.31 percent in March from 1 percent in February, said Frederico Padilha, economist at Ibiuna Investimentos Ltda, in an e-mail interview from Sao Paulo.

Next Steps

The monetary policy committee will evaluate today’s inflation report before determining its next steps, central bank President Alexandre Tombini said today in an e-mail statement, reiterating comments he made on April 2. The committee will hold its next meeting on April 16-17. Tombini had also said the bank changed monetary policy when it altered its communication in January to emphasize inflation concerns.

“The focus of Brazil’s monetary policy has been and will continue exclusively to be the stability of prices,” Tombini said on April 8. “Still, due to remaining uncertainties, the central bank has acted with caution.”

Economists surveyed by the central bank forecast growth of 3 percent in 2013, with inflation of 5.7 percent, and predict the Selic will be at 8.5 percent by year-end. Gross domestic product expanded 0.9 percent last year, slowing from 2.7 percent in 2011 and 7.5 percent in 2010.

Andre Perfeito, chief economist at Gradual Investimentos, forecasts 2.1 percent GDP growth this year and said the central bank will keep rates steady to avoid hobbling the expansion.

“The dirty work of the Selic, which is to control domestic demand, is already in place with the slowdown in the economy,” Perfeito said by telephone from Sao Paulo on April 9.

Rousseff said last month that she did not agree with anti- inflation policies that sacrifice growth, prompting swap rates to dive. She later said her comments were misconstrued.

To contact the reporter on this story: 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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