Brazil’s Consumer Prices Rose Less Than Forecast in October

Brazil’s consumer prices rose less than forecast in October as the central bank implements the world’s biggest interest rate increase.

Inflation as measured by the benchmark IPCA index accelerated to 0.57 percent from 0.35 percent in September, the national statistics agency said. The gain was less than the median forecast of 0.6 percent from 45 analysts surveyed by Bloomberg. Annual inflation slowed to 5.84 percent, surprising analysts surveyed by Bloomberg who predicted it would accelerate.

“It’s good news insofar as the annual rate is slowing, but let’s not get too carried away,” Neil Shearing, chief economist for emerging markets at Capital Economics Ltd., said by phone from London. “What’s driving that slowdown is slowing annual food inflation. Core inflation pressures remain strong and that’s going to concern the central bank.”

The bank has increased interest rates this year faster than any of the 49 economies tracked by Bloomberg to rein in inflation that has remained above target throughout President Dilma Rousseff’s term. Even as economic growth remains weak, prices are being pressured by near record-low unemployment and a weaker currency, which makes imports costlier. The government has also extended tax breaks to consumers that, while boosting demand, have diminished revenue and hampered fiscal accounts.

Standard & Poor’s

Swap rates on the contract due in January 2017 fell 4 basis points, or 0.04 percentage point, to 11.86 percent at 9:50 a.m. local time. The real was little changed at 2.2885 per U.S. dollar.

Ratings agency Standard & Poor’s in June placed Brazil’s rating on negative outlook, and Moody’s Investors Service last month lowered its outlook to stable from positive, with fiscal concerns partly provoking both actions. While deterioration in fiscal policy or inflation may lead to a ratings downgrade, such a move is unlikely in the next 18 months, Goldman Sachs’ chairman in Brazil, Paulo Leme, said at an event in Sao Paulo on Nov. 1.

Brazil’s nominal budget gap in September widened to 22.9 billion reais as the public sector posted the biggest deficit before interest payments in almost five years. A swift decline in the primary surplus alongside the increase in real interest rates will put pressure on debt dynamics ahead of presidential elections next year, according to a report from JPMorgan published Nov. 5.

Rate Increases

The central bank last month raised its benchmark Selic rate to 9.5 percent, marking the fourth straight 50 basis point increase following a quarter-point boost in April. The bank targets inflation of 4.5 percent, plus or minus two percentage points.

“High inflation rates reduce economic growth potential as well as the generation of jobs and income,” central bank President Alexandre Tombini said at an event in the city of Fortaleza on Nov. 4. “Monetary policy must remain especially vigilant.”

Inflation has also received assistance from government-controlled prices, which rose 0.14 percent in October, according to Luciano Rostagno, the chief strategist at Banco Mizuho do Brasil SA. Transportation prices in October climbed 0.17 percent, down from 0.44 percent the prior month.

“The government continues with this strategy of trying to control inflation by regulated prices,” Rostagno said by phone from Sao Paulo. “We know this strategy is not sustainable, so the central bank has no choice but to continue raising rates.”

Food Costs

Prices rose less than expected in October due to food and services inflation, according to Carlos Kawall, chief economist at Banco J. Safra. Food prices rose 1.03 percent in the month, accounting for one-quarter of the overall increases. Service costs gained 0.52 percent, he said.

The real weakened 10.33 percent this year, the third worst performer amid the 16 most traded currencies after the Japanese yen and the South African rand.

Economists polled by the central bank on Nov. 1 forecast inflation will accelerate to 5.92 percent in 2014 as policy makers raise the Selic to 10.25 percent. They forecast the real will reach 2.4 per dollar next year.

Analysts in a weekly central bank survey have cut their economic growth forecast for 2013 to 2.5 percent from 3.26 percent at the start of the year.

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