Brazil 2013 Inflation Exceeds All Estimates and 2012 Level

Brazil’s consumer prices in 2013 exceeded every analyst estimate and accelerated from last year, boosting pressure on the central bank to extend the world’s biggest cycle of raising interest rates. Swap rates increased.

Inflation in the year through December as measured by the benchmark IPCA index accelerated to 5.91 percent from 5.84 percent in 2012, the national statistics agency said today in Rio de Janeiro. That was higher than all estimates from 34 economists surveyed by Bloomberg, whose median forecast was for 5.81 percent. Monthly inflation accelerated to 0.92 percent from 0.54 percent in November, also higher than all forecasts and the fastest increase in more than 10 years.

The central bank led by Alexandre Tombini last year raised benchmark borrowing costs more than any major economy tracked by Bloomberg to stem consumer price increases that damped consumer and business confidence. A weaker real drove up the price of imports, buoying inflation that ended 2013 above the mid-point of the target range for the fourth straight year. The bank’s implicit goal was to bring inflation rates down from 2012, and not having done so increases odds of a longer monetary tightening cycle, according to Enestor dos Santos, principal economist at Banco Bilbao Vizcaya Argentaria.

“The odds of a 50 basis-point adjustment next week are higher, there’s more pressure for monetary tightening,” dos Santos, the top forecaster of the key interest rate according to data compiled by Bloomberg, said by phone. “This also adds to the negative mood on Brazil. I think it could increase the possibility of a credit downgrade. It’s very bad news.”

‘More Resistance’

Swap rates on the contract due in January 2015, the most traded in Sao Paulo today, rose two basis points, or 0.02 percentage point, to 10.6 percent at 12:40 p.m. local time. The real appreciated 0.9 percent to 2.3685 per U.S. dollar.

Inflation “showed slightly more resistance than anticipated,” Tombini said today in a statement posted on the central bank’s website. “That resistance in inflation, in large measure, was due to the currency depreciation over the last semesters, costs originating in the labor market, in addition to recent pressures in the transport sector.”

Standard & Poor’s in June placed Brazil’s rating on negative outlook, and Moody’s Investors Service in October lowered its outlook to stable from positive, citing deteriorating debt and investment ratios and evidence of slow growth.

Transport Prices

Food and beverage prices in December rose 0.89 percent, up from 0.56 percent the previous month. Transport prices increased by 1.85 percent from 0.36 percent the month before, and personal expenses jumped 1 percent from 0.87 percent. The price of services surged 1.16 percent in December.

Policy makers voted unanimously on Nov. 27 to raise the benchmark rate to 10 percent from 9.5 percent, marking the fifth straight 0.5 percentage point increase following a quarter-point boost in April. The central bank next week will elevate borrowing costs by 0.25 percentage point, according to the median estimate of economists surveyed by Bloomberg.

Inflation exceeded the level marked in 2012 even after the government held down regulated prices, which rose 1.55 percent in the year. That’s the slowest increase since 1992, as the government tried to assist the central bank’s effort by lowering energy prices and granting a smaller-than-expected fuel price increase, according to dos Santos.

‘Under Control’

It will be difficult to keep regulated price increases as low in 2014, he said.

“We had an inflation index that was practically stable relative to last year,” interim Finance Minister Dyogo Oliveira told reporters in Brasilia following today’s release of the report. “That, in my opinion, demonstrates that we have inflation under control in Brazil and there is no risk it will get out of control.”

Today’s data suggest the central bank will raise the Selic to at least 11 percent, Andre Perfeito, chief economist at Gradual Investimentos, wrote in a note to clients.

“This is a critical situation, inflation is not on a downward trend,” Roberto Padovani, chief economist at Votorantim Ctvm, said by phone from Sao Paulo. “There is no doubt that this increases the odds of a longer rate increase cycle.”

Increased Call

After release of today’s data, Newton Rosa, chief economist at Sul America Investimentos, increased his call for next week’s monetary policy decision to a 50 basis-point increase, from 25 basis points.

Tombini said as recently as Oct. 11 that inflation would end 2013 below last year’s 5.84 percent. The central bank in quarterly estimates published Dec. 20 forecast inflation would finish 2013 at 5.8 percent. Food and beverage prices jumped 8.48 percent on the year, while personal expenses rose 8.39 percent. Services prices surged 8.75 percent.

The bank targets inflation of 4.5 percent, plus or minus two percentage points. President Dilma Rousseff said Dec. 18 that 2013 would mark the 10th straight year the government meets its target.

“Everything indicates that it will behave, and finish below last year,” Rousseff told journalists in Brasilia the same day.

The real, which on Jan. 8 closed at its weakest level versus the U.S. dollar in more than four months, lost 13 percent of its value in 2013. The central bank extended into 2014 its program of currency swaps sales and dollar loans to buoy Brazil’s currency.

Policy makers will raise the Selic to 10.5 percent by year-end and inflation will accelerate to 5.97 percent, according to economists in the central bank’s latest weekly survey. They forecast economic growth of 1.95 percent this year, down from 2.28 percent in 2013.

Oliveira said there is a “positive expectation” for 2014 inflation, which will remain under control as it has for the past decade.

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