Brazil’s February Consumer Prices Rise Faster Than Forecast

Brazil’s inflation in February accelerated faster than economists forecast for the eighth straight month, prompting traders to boost bets the central bank will raise the key lending rate in April.

Prices as measured by the IPCA price index rose 0.60 percent in February, the national statistics agency said in Rio de Janeiro. That was higher than the median forecast of 0.49 percent from 44 economists surveyed by Bloomberg, and down from the 0.86 jump posted in January. Annual inflation accelerated for the eighth straight month to 6.31 percent from 6.15 percent the month before.

Inflation in the world’s second-largest emerging market has been stoked by government measures intended to revive economic activity. Moves included cuts in interest rates and reductions in electricity tariffs. With inflation running faster than in Mexico, Colombia or Chile and approaching the 6.5 percent upper limit of the central bank’s target range, the monetary policy committee unanimously decided to hold the benchmark rate at a record low for the third straight meeting on March 6.

Dynamics ‘Bad’

“In the best of situations, taking into the account the decline in electricity rates, we’re talking about inflation running at around 5 percent,” Jankiel Santos, chief economist at Banco Espirito Santo de Investimento SA, said in a telephone interview from Sao Paulo. “That shows the dynamics of inflation are very, very bad.”

Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo today, rose 17 basis points to 7.96 percent. The real gained 0.7 percent to 1.9442 per dollar.

“Inflation in Brazil is under control and is on track to the center of the target in an adequate period,” deputy Finance Minister Nelson Barbosa told reporters in Brasilia.

Barbosa said inflation in February was “a little higher than expected” and will fall gradually throughout the year as commodity prices are passed through to consumer prices.

“We need to work toward re-anchoring inflation expectations,” central bank President Alexandre Tombini said at an event in New York on Feb. 25.

Increased Bets

The bank’s March 6 statement removed a plan to keep interest rates stable “for a sufficiently prolonged period” from its language, prompting traders to increase bets on a rate increase in April. Instead, it said the committee “will monitor the evolution of the macroeconomic scenario until its next meeting, in order to define the next steps in its monetary policy strategy.”

Food and beverage inflation slowed to 1.45 percent in February from 1.99 percent in January, the agency said. Due to lower electricity tariffs, housing prices declined 2.38 percent. Education prices rose 5.4 percent because of tuition prices in the new school year.

Inflation has exceeded the 4.5 percent midpoint of the bank’s target range for 30 months, and Brazil’s economy grew 0.9 percent last year, its slowest pace since 2009. Economists surveyed by the central bank forecast 5.7 percent inflation and 3.09 percent growth this year.

The central bank is “going to really observe the data and if there’s any type of spike, especially in the services area, they’ll be more apt to hike, and if there’s not then they won’t,” Bret Rosen, a Latin America strategist at Standard Chartered Bank, said by telephone from New York. “They’re more apt to be tolerant of a higher inflation rate than their peers in Mexico, Colombia, Peru and Chile.”

More Measures

Rousseff last year attempted to boost economic activity with a series of tax cuts for consumer and industrial goods, and for payrolls of 40 industries. Her administration also leaned on commercial banks to lower interest rates and cut the long-term lending rate to a record low 5 percent.

This year is likely to bring more government measures to control inflation and stimulate the economy even though they weren’t successful last year, Kathryn Rooney Vera, a macroeconomic strategist at Bulltick Capital Markets, said.

“The government model has been a failure,” Rooney Vera said by telephone from Miami on March 5. “Brazil doesn’t have a global competitive advantage in manufacturing yet that’s what the government is targeting. They’re also targeting consumption when domestic demand is good and the labor market is tight, so of course inflation is going to go higher.”