Brazil’s Consumer Inflation Exceeds All Estimates in Mid-May

  • Data limits central bank’s ability to cut interest rates
  • Stubborn inflation a challenge for incoming central bank chief

Brazil’s inflation accelerated more than all analysts forecast in the month through mid-May, underscoring the challenges incoming central bank chief Ilan Goldfajn will find to rein in prices.

Inflation as measured by the IPCA-15 index accelerated to O.86 percent from 0.51 percent a month earlier, the national statistics agency said Friday. That compares with the median estimate from 38 analysts surveyed by Bloomberg for a 0.77 percent increase. Twelve-month inflation accelerated to 9.62 percent, from 9.34 percent previously.

Cooling annual inflation that’s still more than double the target will be the chief task of Goldfajn, who this week was nominated to replace Alexandre Tombini as central bank governor. Above-target inflation will limit the monetary authority’s ability to lower borrowing costs in a bid to stimulate the economy, which is mired in a two-year recession. Today’s data shows inflation will be slow to converge to target, according to Edward Glossop, emerging-market economist at Capital Economics Ltd.

“The market has stared to price in earlier interest rate hikes, but this data probably strengthens the case that interest rate cuts will come later in the year, which is indeed our view,” Glossop said by phone. “The new governor is more likely to demonstrate his inflation fighting credentials and leave interest rates unchanged for longer.”

Swap rates on the contract due in January 2017 rose 0.1 basis point to 13.68 percent at 9:59 a.m. local time. The real gained 0.6 percent to 3.5434 per U.S. dollar.

Prices for food and beverages rose 1.03 percent from 1.35 percent in the month through mid-April, and accounted for more than one-quarter of the monthly price increase, the statistics agency said. Prices for health and personal care items jumped 2.54 percent after the government allowed costs to rise for medicine -- the single largest contributor to inflation in the month.

Brazil’s cost-of-living in the month of April, as measured by the IPCA index, also came in above all expectations, led by food and medicine price increases. Nevertheless, the market boosted bets that, under Goldfajn, the central bank will start lowering the benchmark Selic rate as soon as July.

Analysts surveyed by the central bank recently increased their forecast for year-end inflation to 7 percent, after steadily lowering their outlook for more than two months. The monetary authority targets inflation of 4.5 percent, plus or minus two percentage points.

“The still complex and uncertain inflation outlook validates and justifies the prudent central bank stance and the forward guidance” that there’s still no room for monetary policy easing in the near term, Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., wrote in a note.

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