Brazil Mid-February Inflation Accelerates More Than Forecast

Brazil’s consumer prices accelerated faster than economists forecast in the month through mid-February, driven by a jump in education costs and household articles. Swap rates rose.

Consumer prices as measured by the IPCA-15 index rose 0.70 percent, the national statistics agency said in a report published on its website today. That was more than the 0.68 percent median estimate from 40 economists surveyed by Bloomberg. Annual inflation accelerated to 5.65 percent from 5.63 percent the previous month, compared with a median estimate of 5.62 percent.

Finance Minister Guido Mantega yesterday announced a reduction of 44 billion reais ($18.6 billion) in budgeted expenditures for 2014, saying the cut will help hold consumer prices down and allow monetary policy to be less rigorous. Inflation in the world’s second-biggest emerging market has stayed above target for more than three years, prompting the central bank’s monetary policy committee, Copom, to increase interest rates at seven consecutive meetings.

“People are seeing that the dynamics are still bad, which is not what we want to see before a Copom meeting takes place,” Jankiel Santos, chief economist at Banco Espirito Santo de Investimento, said by phone from Sao Paulo. “Core inflation measures are very high.”

Swap rates on the contract maturing in January 2015 rose four basis points, or 0.04 percentage point, to 11.08 percent at 10:10 a.m. The real weakened 0.2 percent to 2.3742 per U.S. dollar.

Analysts Divided

Policy makers have raised the benchmark Selic to 10.5 percent from a record-low 7.25 percent in April. The central bank also extended by six months into June a program of selling foreign-exchange swaps to bolster Brazil’s currency. The bank’s monetary policy committee meets next week, with analysts divided over whether to expect a half-point or quarter-point increase.

Inflation accelerated to 5.91 percent in 2013 from 5.84 percent the prior year, and slowed to 5.59 in January. Economists polled weekly by the central bank expect inflation to reach 5.93 percent this year and remain above target in 2015, according to the survey published on Feb. 17. The bank targets price increases of 4.5 percent, plus or minus two percentage points.

The diffusion index, a measure of how widespread inflation is throughout goods and services, fell to 70 percent, which remains high, said Santos.

Education Prices

Education prices jumped 6.05 percent in the month through mid-February from 0.5 percent the previous month, while the cost of household articles such as appliances rose 1.17 percent after a 0.49 increase last month. Together they accounted for nearly half of headline inflation. Food and beverage inflation slowed to 0.52 percent in mid-February from 0.96 percent in mid-January.

The government’s goal in cutting the budget is to maintain solid public accounts and combat inflation, Mantega told reporters in Brasilia yesterday. “The fiscal policy we’re carrying out helps monetary policy be less severe,” he said.

‘Willing to Believe’

Even with inflation exceeding expectations today, the increase in swap rates was mild because of yesterday’s announcement by Mantega, Pedro Tuesta, an economist at 4Cast Ltd. The central bank has raised rates by 50 basis points in each of its last six meetings.

“At the end of day what matters is what the central bank wants, and sometimes it looks at short-term inflation, sometimes it doesn’t,” Tuesta said by phone from Washington. “In this case, after what Mantega said yesterday, the market is more willing to believe that we’re not going to have 50 basis points anymore.”

In June, Standard & Poor’s placed Brazil’s rating on negative outlook and Moody’s Investors Service lowered its outlook to stable in October, both citing deterioration of public accounts. The fiscal goals indicate that there will be no material fiscal adjustment until after general elections in October, according to Moody’s analyst Mauro Leos.

“While the announcement serves to diminish market concerns, at this time we are more focused on the end result,” Leos said in an e-mailed statement yesterday.

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