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Biggest Brazil Price Jump in Year Undermines Rate Cut Goal

Brazil's President Dilma Rousseff
Brazil's President Dilma Rousseff. Photographer: Jonathan Ernst/Bloomberg

Brazilian consumer prices rose more than economists expected in April, jumping the most in a year, reinforcing bets the central bank will have to unwind interest rate cuts after lowering borrowing costs to a record low in coming months.

Prices, as measured by the benchmark IPCA index, rose 0.64 percent in April, the national statistics agency said in Rio de Janeiro today. The increase was more than all but three of 47 analysts surveyed by Bloomberg whose median estimate was for a 0.59 percent increase. Annual inflation slowed to 5.10 percent from 5.24 percent.

A 12.3 percent decline in the real over the past three months is pushing up the cost of imports, adding to price pressures in Latin America’s biggest economy fueled by near-record low unemployment. Today’s report reinforces bets that the central bank will miss its 4.5 percent inflation target this year as the economy recovers, prompting yields on most interest rate futures to rise.

“The perception in the market is that the interest rates will continue to fall, but will go up next year,” Jose Francisco de Lima Goncalves, chief economist at Banco Fator SA, said in a phone interview from Sao Paulo.

Traders expect policy makers to cut the benchmark rate to a record 8 percent by August before raising it to 9.75 percent by December 2013. Since August, the central bank has cut the Selic rate by 350 basis points to revive economic growth that slowed to 2.7 percent last year from 7.5 percent in 2010.

Savings Changes

To pave way for lower borrowing costs, President Dilma Rousseff last week reduced century-old rules guaranteeing mandatory returns on savings accounts should the Selic rate fall to 8.5 percent or below. The move aims to deter investors from shifting money from public bonds to savings accounts, which earn interest tax free and don’t carry asset management fees.

The yield on the interest rate futures contract maturing in January 2014 rose 7 basis points to 8.45 percent at 10:40 a.m. Brasilia time. The real weakened 0.9 percent to 1.9573 per U.S. dollar.

An obstacle-free path to lower rates doesn’t necessarily mean the central bank will cut rates aggressively in the months ahead. Policy makers said in the minutes to their April 26 policy meeting that any additional monetary easing should be carried out with “parsimony.”

Tax Cuts

In order to reach its target of 4.5 percent economic growth this year, the government has also cut taxes on consumer and industrial goods, increased subsidized credit by the state development bank BNDES and pledged to boost investments in infrastructure.

Analysts forecast the government’s effort to boost growth will prevent inflation from slowing back to target this year and next, according to a central bank survey published May 7. Consumer prices in Brazil will rise 5.12 percent this year and 5.56 percent in 2013, the survey showed. Inflation has been above the midpoint of the bank’s target range for 21 months.

Personal expenses in April rose 2.23 percent, up from 0.55 percent in the previous month, led by an increase in cigarette prices and higher salaries for maids and domestic servants. Housing prices rose 0.8 percent, while food and beverages gained 0.51 percent, the statistics agency said.

Currency Pass-Through

Prices as measured by the Getulio Vargas Foundation’s IGP-DI index rose 1.02 in April, the most since November 2010 and nearly twice the 0.56 percent reported the previous month. The rising cost of imported goods such as petrochemicals has pushed up the price of agricultural products 3.37 percent so far this year, according to the index, which measures wholesale, consumer and construction prices.

Inflationary pressures should ease in the coming months, allowing the central bank to cut the Selic by a total of 150 basis points in the current easing cycle, said Leonardo Sapienza, chief economist at Banco Votorantim.

“You still have a benign inflation scenario with a poor global outlook and only moderate domestic economic growth,” Sapienza said by telephone from Sao Paulo. “There are more than enough elements that reinforce rate cuts.”

The central bank is no longer pursuing inflation control as its ultimate goal, Trade Minister Fernando Pimentel told Brasil Economico yesterday.

While price stability remains a necessity, the government’s final objective is promoting economic growth, job creation and social well-being, Pimentel said in an interview with the Sao Paulo-based newspaper.

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