Brazil Mid-May Inflation Slowest in Six Months as Food Eases

Brazil’s inflation in the month through mid-May was the slowest since November as food price increases eased, supporting analyst estimates the central bank will stop raising borrowing costs next week. Swap rates fell.

Inflation as measured by the benchmark IPCA-15 index decelerated to 0.58 percent from 0.78 percent the prior month, the national statistics agency said on its website today. That was faster than the 0.56 median estimate of 42 analysts surveyed by Bloomberg.

Inflation has persisted above target throughout Dilma Rousseff’s presidency, eroding purchasing power and reducing support for the government. The central bank has boosted interest rates by 3.75 percentage points to slow consumer price increases even as the economy shows signs of easing. Today’s data gives policy makers space to pause monetary tightening after nine straight increases, economist Jankiel Santos said.

“This is everything the central bank wanted to see before its next meeting,” Santos, chief economist at Banco Espirito Santo de Investimento, said by phone. “Now they can argue that inflation coming from foodstuffs isn’t really a problem anymore and therefore inflation is going to obey from now on.”

Swap rates on the contract due in January 2015, the most traded in Sao Paulo today, fell 2 basis points, or 0.02 percentage point, to 10.92 percent at 10:06 a.m. local time. The real strengthened 0.2 percent to 2.2123 per U.S. dollar.

Food Prices

Food prices rose 0.88 percent in the month through mid-May, down from 1.84 percent in the prior month, the statistics agency said. Housing prices increased 1.19 percent as electricity costs climbed, while health and personal care prices grew 1.2 percent.

Annual inflation quickened to 6.31 percent from 6.19 percent the prior month, exceeding the median estimate of 6.29 percent, the statistics institute said. Policy makers target 4.5 percent inflation, plus or minus two percentage points.

Thirty out of 35 analysts surveyed by Bloomberg estimate the central bank will keep benchmark borrowing costs unchanged at their meeting on May 27 and 28 after boosting them to 11 percent from a record-low 7.25 percent last year.

Analysts surveyed weekly by the bank estimate it will raise interest rates another quarter-point to 11.25 percent by year-end, as inflation quickens to 6.43 percent.

‘Trade-off’

With annual inflation still accelerating, another quarter-point increase now rather than toward the end of the year would shore up the central bank’s credibility, according to Andre Perfeito, chief economist at Gradual Investimentos.

“That’s what would be best for the central bank to do, but most likely it won’t do it,” Perfeito said by phone from Sao Paulo. “In the trade-off between inflation and activity, it would be much better to control inflation expectations.”

Economic growth in Latin America’s largest economy will slow to 1.8 percent this year from 2.3 percent in 2013, falling short of the regional average for the fourth consecutive year, according to analysts polled by Bloomberg. Confidence (BZFGCCSA) of shoppers in April plunged to the lowest level in almost five years, according to data published by the Getulio Vargas Foundation.

In a Datafolha inquiry published May 9, 37 percent of those surveyed said they would vote for Rousseff in October elections, down from 44 percent in February. The survey suggested she would not win in the first round, when a candidate must poll better than the total of her challengers.

Rousseff is taking steps to contain consumer prices ahead of the vote such as delaying tax increases on beer and beverages as well as cutting spending from the budget. Her finance minister, Guido Mantega, said in an interview televised May 6 that inflation wouldn’t exceed the ceiling of the target range as food price increases start to ease.

“Mine will be the government that always fights inflation,” Rousseff said in a radio notice organized by her political party that aired May 15. “The government will have a strong hand against inflation without hurting salaries.”

To contact the reporter on this story: David Biller in Rio de Janeiro at dbiller1@bloomberg.net

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

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