Tombini Signals Rate Rise as Brazil Prices Unexpectedly Slow

Brazil’s consumer prices unexpectedly slowed in the month through mid-January as the central bank signals it will extend the world’s biggest interest-rate increase. Swap rates dropped.

Consumer prices as measured by the IPCA-15 index gained 0.67 percent in the month through mid-January, the national statistics agency said in a report published on its website today. That was less than every forecast from 42 economists surveyed by Bloomberg, whose median estimate was for a 0.79 percent rise.

In report released earlier today, central bankers led by Alexandre Tombini said it was “appropriate” to maintain the current pace of interest rate increases, repeating language used to justify the previous six half-percentage-point increases that have pushed the Selic rate to 10.5 percent from 7.25 percent in April. They said inflation, which has been above target for more than three years, remains persistent.

Swap rates dropped across the board as traders placed bets the central bank will have room in February to slow the pace of rate increases to a quarter-point from half a point after inflation slowed more than expected. The contract maturing in January 2015, the most traded in Sao Paulo today, fell nine basis points to 10.98 percent at 12:22 p.m. local time. The real weakened 0.05 percent to 2.3721 per U.S. dollar.

“IPCA-15 came down and people will say the central bank can move on, but at a slower rhythm,” said Roberto Padovani, chief economist at Votorantim Ctvm Ltda, by phone from Sao Paulo. “The inflationary risk is very high in the country.”

Key Rate

Padovani changed his outlook and now predicts the central bank will raise the key rate to 11.25 percent this year.

Controlling inflation will always be a priority for Brazil’s government, Finance Minister Guido Mantega told reporters in Davos today. Latin America’s biggest economy has increased borrowing costs more than any of 49 global economies tracked by Bloomberg.

Annual inflation through mid-January slowed to 5.63 percent, the slowest rate since October 2012. That compares with a median estimate of 5.76 percent.

The central bank said that consumer price increases have been slightly bigger than anticipated and reiterated that a weaker real may stoke prices in the short term. Policy makers said faster inflation may erode confidence in the economy, slowing growth.

Today’s deceleration in inflation was temporary and tied to a fall in airfare prices after the holiday season, said Flavio Serrano, an economist at Banco Espirito Santo de Investimentos. Airfare fell 16.3 percent in the month, shaving 0.1 percentage point off the headline inflation figure, according to the statistics institute.

Widespread Inflation

The diffusion index, an indicator of how widespread inflation is across goods and services, rose to 75.1 percent, matching the level one year ago that was the highest in eight years, according to Serrano.

Analysts in the latest weekly central bank survey expect inflation to accelerate to 6.01 percent by December as economic growth slows to 2 percent from 2.3 percent last year, according to the study published on Jan. 20.

Family and business sentiment has worsened in the face of persistent inflation. Consumer confidence as measured by the Fundacao Getulio Vargas fell in December to its lowest level since July, while industrial confidence was lower in January than when policy makers started raising rates in April.

Yearly Growth

Brazil’s gross domestic product in the third quarter contracted from the previous three months by the most since 2009, as yearly growth dropped to 2.2 percent. Total economic activity in November also fell, according to central bank estimates, as industrial output declined.

Latin America’s largest economy will expand in 2014 below the regional average for the fourth straight year, according to estimates compiled by Bloomberg.

“The big picture is that inflation is not going to come down much more from here,” Neil Shearing, chief emerging markets economist at Capital Economics Ltd, said by phone from London. “The central bank minutes are still quite hawkish. There are references to the continuation of policy tightening and inflation being above target.”

Before it's here, it's on the Bloomberg Terminal.