Brazil’s Prices Rise at Fastest Pace in Almost Eight Years

Brazilian consumer prices rose in January at the fastest pace since April 2005, raising pressure on the central bank, which has said it will keep interest rates at a record low for a prolonged period. Swap rates rose.

Prices as measured by the benchmark IPCA index climbed 0.86 percent in the month, marking the fifth-straight acceleration, the national statistics agency said today in Rio de Janeiro. The median estimate of 41 economists surveyed by Bloomberg was for a

0.83 percent increase. Annual inflation accelerated to 6.15 percent from 5.84 percent the previous month.

President Dilma Rousseff’s administration has cut taxes and borrowing costs to jump-start growth that in 2012 was slower than any other major Latin American economy, even as inflation has remained above the central bank’s 4.5 percent target for 29 months. With the economy recovering at a slower than expected pace, the government is seeking alternative measures to rein in prices, instead of raising the benchmark interest rate that is at a record low 7.25 percent. Still, the level of inflation is uncomfortable, bank President Alexandre Tombini said.

Short Term

Tombini, in an interview with columnist Miriam Leitao published on newspaper O Globo’s website, said price increases are a concern in the short term and that policy makers are assessing everything. Inflation will slow in the second half and is not out of control, he told the Rio de Janeiro-based newspaper. The price increase in January will be the largest all year, he added. The central bank confirmed Tombini’s statements published in O Globo, according to a spokesman who asked not to be identified, citing internal policy.

The central bank is “going to be more uncomfortable with this inflation figure,” Enestor Dos Santos, senior Brazil economist at Banco Bilbao Vizcaya Argentaria SA, said by phone from Madrid. “I expect their next communication to turn more hawkish, but I still don’t expect them to adjust interest rates. They’re going to use other tools to try to prevent inflation from running out of control.”

Swap rates on the contract maturing in January 2015 rose 11 basis points, or 0.10 percentage point, to 8.19 percent as of 12:34 a.m. local time. The real strengthened 1.2 percent to

1.9672 per U.S. dollar.

Tax Cut

Food and beverage prices rose 1.99 percent in January, the highest monthly increase since November 2010, accounting for more than half the monthly increase. Brazil plans to scrap federal taxes on food staples as it seeks to slow price increases, Rousseff said this week. The tax cut could take 40 basis points off annual inflation, said Roberto Padovani, chief economist at Votorantim Ctvm Ltda.

Food and drinks represented 23.9 percent of family budgets in 2012, and were the second-largest source of inflation after personal expenses. Such expenses increased 1.55 percent in January.

The government has also moved to stem inflation by keeping a lid on fuel prices. State-controlled oil company Petroleo Brasileiro SA on Jan. 29 raised gasoline prices 6.6 percent at the refinery in order to reduce the difference between what the company pays for the fuel abroad and the controlled price in Brazil. The increase was less than analysts had forecast, sending the company’s stock price to the lowest in six months the next day.

Faster Growth

Economists surveyed by the central bank forecast economic growth of 3.1 percent in 2013, with inflation of 5.68 percent. The bank estimates the economy grew 1 percent last year, decelerating from 2.7 percent in 2011 and 7.5 percent in 2010.

The central bank’s “reduction in rates is sustainable because it’s done with inflation under control,” Finance Minister Guido Mantega said at an event in Sao Paulo on Feb. 5.

“You have an upward trend in inflation and I think next year the policy rate has to be normalized, because 7.25 percent is not the neutral level,” Padovani said by phone from Sao Paulo.

Inflation has also been bolstered by a currency that weakened 9 percent against the U.S. dollar in 2012, more than all 16 major currencies tracked by Bloomberg except the yen. A weaker real boosts the cost of imports.

The real rallied to more than 2 per dollar on Jan. 28 for the first time since July after the central bank auctioned foreign-exchange swap contracts. Mantega said on Feb. 5 that ideally there would be less volatility and intervention in the currency market.

The bank in the coming weeks is likely to test the Finance Ministry’s tolerance for currency appreciation, Barclays Plc economists Marcelo Salomon and Guilherme Loureiro said in a note on Jan. 30. A fall to 1.8 per dollar would shave 50 basis points off 2013 inflation, they said.

(Updates with Tombini comment in third paragraph.)
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