Brazil Facing Increased Threat of Inflation Breaching Target

Brazil’s central bank said inflationary pressures have spread, increasing the probability that price increases will breach the upper limit of the target range for the first time in a decade.

Policy makers estimate there is a 25 percent chance inflation will exceed 6.5 percent in 2013, even under a scenario in which the benchmark interest rate rises to 8 percent this year from a record low 7.25 percent, according to the quarterly inflation report published today. In December, they saw a 14 percent chance of breaching the inflation ceiling. They forecast the economy will grow 3.1 percent.

President Dilma Rousseff said yesterday that while the government is attentive to inflation, she opposes measures that will undermine economic expansion. Traders reinforced bets today that the central bank will delay a rate increase until May on a disinflationary global outlook even as it increased its inflation forecast, Newton Rosa, chief economist at SulAmerica Investimentos in Sao Paulo, said by phone.

“The central bank reiterated that faster inflation, despite some isolated factors, is of a more permanent nature, a sign that it needs to raise rates,” Rosa said. “But they do point out several caveats. That shows they will raise rates, but are not in a hurry.”

Swap rates on the contract due in January 2014, the most traded in Sao Paulo today, rose one basis point to 7.75 percent as of 12:38 p.m. local time. The real weakened 0.3 percent to

2.0175 per U.S. dollar.

Slowing Growth

The Rousseff administration is trying to spark the economy after two years of slowing growth without stoking inflation that accelerated more than analysts expected in the eight months through February.

The inflation rate climbed to 6.31 percent in February from

6.15 percent the month before, compared with the central bank’s target range of 2.5 percent to 6.5 percent.

Inflation converging to the 4.5 percent target in 2013 is “unrealistic,” Carlos Hamilton, the central bank’s director of economic policy, said in a press conference in Brasilia today. “Much can be done” for inflation to converge in 2014, he said.

In today’s quarterly inflation report, policy makers said prices will increase 5.8 percent this year, according to its market scenario, which considers the key rate at 8 percent and the exchange rate at 2 per dollar by year-end. In December, the monetary policy committee, or Copom, said prices would rise 4.9 percent this year.

Global Weakness

While inflation was more widespread and resistant due to seasonal and transportation price pressures, economic activity in mature economies remained weak and commodity prices are expected to fall, the central bank said.

“The Copom considers that the international scenario, despite a marginal improvement, still is an important factor in containing aggregate demand,” the bank said today.

Rousseff’s comment yesterday that anti-inflation policies shouldn’t sacrifice growth caused traders to pare bets that the central bank would increase rates. Rousseff later said there had been “an inadmissible manipulation of my speech.”

“Killing the patient instead of curing the disease is a bit complicated,” Rousseff said to reporters at the summit of the so-called BRICS nations in South Africa. “Am I going to put an end to growth? That’s an outdated policy.”

Brazilian central bank President Alexandre Tombini said from South Africa that Rousseff had asked him to help clarify the misunderstanding over her comments, according to an interview published on the website of newspaper Estado de S. Paulo. The central bank speaks on interest-rate policy, he said, according to the Sao Paulo-based newspaper.

Analyst Forecasts

Economists in the latest weekly central bank survey forecast inflation of 5.71 percent this year and economic growth of 3 percent, following a 0.9 percent expansion last year.

The Copom report repeated language from the minutes of its March 6 meeting, saying it would monitor the macroeconomic scenario to define the next steps of monetary policy at its April 17 rate decision.

In all its scenarios annual inflation will remain above the mid-point of its target range through the first quarter of 2015, the central bank said. Fiscal policy in 2013 will reflect a contractionary trend if the government meets its primary surplus target, it said.

Policy makers cut the benchmark interest rate to a record in October and have since kept it unchanged. As part of the plan to boost economic growth without stoking inflation, the administration reduced taxes on food and payrolls, and cut energy costs.

Tax cuts only have a short-term impact on prices, Hamilton said today. Inflation has been fueled by food prices, a tight labor market and the weakening of the currency last year, which makes imports more expensive.