Brazil Nov. Inflation Surprises Every Economist Surveyed

Brazil’s inflation unexpectedly accelerated as central bank President Alexandre Tombini reiterated his plan to hold interest rates at their current level, while investors bet on more cuts next year.

Prices as measured by the benchmark IPCA index rose 0.6 percent in November, the national statistics agency said today in Rio de Janeiro, more than any economist forecast in a survey by Bloomberg. Swap rates jumped.

Tombini told reporters yesterday that the bank is standing by its monetary policy strategy after traders rocked markets with bets he will resume cutting borrowing costs. The bank yesterday released its minutes to last week’s monetary policy meeting and pledged to keep the Selic rate at a record low 7.25 percent for a prolonged period.

“The adequate strategy to bring inflation back to target is to keep the stability of the monetary conditions for a sufficiently prolonged period,” Tombini said in Brasilia, repeating language used in the statement from the Nov. 28 meeting. “The minutes couldn’t be more up to date.”

Brazil last week announced that the economy grew in the third quarter by 0.6 percent from the previous period, half the expansion forecast by economists. President Dilma Rousseff’s government has enacted stimulus measures over the past year to boost demand, including tax cuts for consumer and industrial goods, pressuring banks to lower lending spreads and the biggest cut in its benchmark rate among Group of 20 nations. Lower growth has not succeeded in taming inflation.

The highest estimate from the 39 economists surveyed by Bloomberg was for a 0.56 percent price increase in November, and the median call was for a gain of 0.5 percent. Annual inflation accelerated to 5.53 percent from 5.45 percent the previous month.

Food Shock

“Food prices were a little bit higher than we expected, but we’ve been seeing a seasonal trend for those prices since the shock in the middle of the year,” Roberto Padovani, chief economist at Votorantim CTVM, said in a phone interview from Sao Paulo. “The most important point is really services inflation, which is running close to 8 percent and will keep running at close to 8 percent for the coming year.”

Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo today, rose 12 basis points, or 0.12 percentage point, to 6.99 percent as of 10:42 a.m. local time, after earlier jumping as high as 7.04 percent. The real weakened 0.1 percent to 2.0798 per U.S. dollar.

More Cuts

The disappointing third quarter led some economists, such as Ilan Goldfajn, chief economist for Itau Unibanco Holding SA, and Marcelo Salomon, co-head for Latin America economics at Barclays Plc, to forecast more rate cuts next year, even as price increases run faster than the central bank’s target. The bank aims for inflation of 4.5 percent, plus or minus two percentage points.

The bank will make two 50 basis-point cuts in the first half of 2013, Goldfajn and Salomon said in separate notes this week. Goldfajn reduced his projection for economic growth next year to 3.2 percent from 4 percent.

“The bottom line is that you recalibrate the optimal level of interest rates,” Salomon said in a telephone interview from New York yesterday. “Inflation will be hovering around 5.5 percent with the risk of being stronger, but still below the upper bound of the target.”

Food Prices

In November, food and beverage prices rose 0.79 percent, compared with 1.36 percent in October. Prices excluding food and beverages climbed 0.54 percent, up from 0.35 percent in October. Brazil’s wholesale price index, IGP-M, fell in November for the first time since February, the Getulio Vargas Foundation said on its website Nov. 29.

“Current data indicate that the slowdown in food prices and the decline in agricultural prices have run their course,” Itau’s Goldfajn wrote in his note.

Other economists say rate cuts would not help. Lower rates would merely feed higher inflation with little positive impact on growth, Tony Volpon, head of research for the Americas at Nomura Securities Co. Ltd, said in a note to clients yesterday.

“If the Brazilian central bank does rush into more rate cuts early next year, where growth will likely still not be impressive, we think it will just add to the mess it will ultimately have to clean up later on in the year,” Volpon wrote.

Darker Outlook

While the third-quarter results darken the outlook for 2012, the perspective is still positive given the government measures that will come to bear, Votorantim’s Padovani said.

“We see the economy moving above capacity by the end of next year,” he said. “As a consequence we see a rate hike in 2013. I don’t buy what everyone was talking about yesterday that we can have new cuts in Brazil because third-quarter GDP was weak.”

Brazil will grow 3.7 percent in 2013, following 1.27 percent growth this year, according to the latest central bank survey of about 100 economists. The economists are expecting inflation of 5.4 percent next year. Finance Minister Guido Mantega forecasts growth of 4 percent next year.

“Whoever bets against Brazil is making a bad bet,” Finance Minister Guido Mantega said in an interview on Dec. 4. “We are in a transition period.”

Since last week’s disappointing growth report, the government has stepped up efforts to revive the economy. Among other measures it reduced interest rates charged by the state development bank, launched a program to attract private investment to the nation’s overextended ports and extended payroll tax cuts to ailing industries.

Rousseff’s government in 2013 will also reduce electricity rates, which will have a deflationary impact of 35 to 50 basis points, Padovani said.

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