Brazil January Inflation Slower Than All Economist Estimates

Brazil’s consumer prices rose less in January than economists estimated, reinforcing bets the central bank will slow the pace of interest rate increases in the world’s second-biggest emerging market. Swap rates fell.

Inflation as measured by the benchmark IPCA index decelerated to 0.55 percent from 0.92 percent in December, the national statistics agency said today in Rio de Janeiro. That was less than every forecast from 48 analysts surveyed by Bloomberg, whose median estimate was 0.61 percent. Annual inflation slowed to 5.59 percent, the lowest rate since November 2012.

President Dilma Rousseff has been unsuccessful in slowing consumer price increases to the official target even as policy makers boost benchmark borrowing costs and economists lower their growth estimates. While annual inflation is due to accelerate in coming months, the January result gives monetary authorities room to end a tightening cycle that began in April as they look to other measures to hold down prices, said Enestor dos Santos, an economist at BBVA.

“The number was very positive and should help the central bank slow the pace of hikes,” dos Santos, the top forecaster of the key interest rate according to data compiled by Bloomberg, said by phone. “They’ll look to more currency intervention, administered prices, and macro-prudential measures to cap price increases.”

Swap rates on the contract due in January 2015, the most traded in Sao Paulo today, fell nine basis points, or 0.09 percentage point, to 11.4 percent at 12:40 p.m. local time. The real, which depreciated 13 percent last year, strengthened 0.2 percent to 2.3778 per U.S. dollar.

Transport Costs

The biggest factor in the inflation slowdown was lower transportation prices, which fell 0.03 percent in January after a 1.85 percent increase in December, the statistics agency said. Excluding gasoline prices and airfare, consumer price increases slowed to 0.60 percent from 0.64 percent, according to Juliano Ferreira, a strategist at Icap do Brasil Ctvm.

Policy makers led by central bank President Alexandre Tombini voted unanimously on Jan. 15 to raise the benchmark Selic rate to 10.5 percent from 10 percent, marking the sixth straight 50 basis-point increase following a quarter-point boost in April.

Brazil’s currency on Feb. 3 closed at 2.4403 per dollar, its weakest level versus the U.S. dollar in more than five months. Analysts polled by the central bank forecast it will fall further this year to 2.47 per dollar.

Core inflation slowed while activity indicators remain weak, according to Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc. Barring external factors including a weaker real, that should “move the monetary policy needle further towards a 25bp hike,” Ramos wrote in a note to clients.

Commitment Affirmed

“I reaffirm our commitment to measures aimed at converging inflation to the center of the target range,” Rousseff, who is eligible to run for re-election in October, wrote in a message to lawmakers Feb. 3.

The central bank targets inflation of 4.5 percent, plus or minus two percentage points. Inflation accelerated to 5.91 percent in 2013 from 5.84 percent the prior year.

Inflation will continue to be pressured by a weaker exchange rate that raises the prices of imported goods, and by record-low unemployment, according to Bill Adams, senior international economist for PNC Financial Services Group. The central bank will maintain the half-point pace of increases at its next meeting, he said.

“While favorable base comparisons have lowered the headline year-ago inflation rate, this is a data artifact,” Adams wrote in an e-mailed note. “Brazilian inflation has, in fact, picked up noticeably.”

Violent Protest

Street protests against a bus fare increase turned violent in Rio de Janeiro late yesterday, forcing stores and subway stations to shut down as police fired tear gas at demonstrators. The municipality is scheduled to increase the fare by 0.25 reais on Feb. 8 to 3 reais ($1.26).

Last June bus fare increases triggered the largest street protests in two decades.

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 fiscal policy. Brazil’s government has responded by raising some taxes to shore up government finances. By contrast, Mexico had its credit rating upgraded by Moody’s Investors Service on Feb. 5.

Brazil’s benchmark Ibovespa index has fallen 18 percent in the last year, versus a 10 percent loss for Mexico’s IPC benchmark.

’No Way’

Bill Gross, co-founder and chief investment officer at Pacific Investment Management Co., said Jan. 15 that Brazil is no longer a preferred emerging market after Pimco funds were hurt by bullish bets on the nation in 2013. The world’s largest fixed-income manager said he still finds Mexican debt attractive.

Today’s data increase the odds of a 25 basis-point increase in the next meeting, even with the center of the target unreachable until at least 2015, said Daniel Weeks, chief economist at Garde Asset Management in a telephone interview.

Policy makers will raise the Selic to 11 percent by year-end and inflation will accelerate to 6 percent, according to economists in the central bank’s latest survey. Gross domestic product will climb 2.1 percent in 2014 after growing 2.3 percent in 2013, falling short of the Latin American average in both years, according to analysts polled by Bloomberg.

“If inflation hadn’t fallen, no way they would’ve sanctioned a slower pace of tightening,” Neil Shearing, chief emerging-markets economist at Capital Economics Ltd, said by phone from London. “Given that it fell, it puts that possibility on the table, but it’s not a done deal by any stretch of the imagination.”

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