Brazil March Inflation Faster Than Every Economist Estimate

Brazil’s consumer prices rose more in March than economists estimated, increasing pressure on the central bank to extend the world’s longest cycle of interest rate increases. Swap rates increased.

Inflation as measured by the benchmark IPCA index accelerated to 0.92 percent from 0.69 percent in February, the national statistics agency said today in Rio de Janeiro. That was faster than forecast by all 40 analysts surveyed by Bloomberg, whose median estimate was for an 0.85 percent rise. Annual inflation quickened to 6.15 percent from 5.68 percent, marking its fastest rate since July.

The government’s popularity dropped in two polls posted in the past fortnight as Brazilians express concern that prospects for faster inflation will crimp their purchasing power. Policy makers have responded to consumer price pressures by boosting benchmark Selic borrowing costs in every meeting over the past 12 months while signaling that tightening may be coming to an end. Today’s data raise the likelihood that interest rate increases aren’t yet over, economist Enestor dos Santos said.

“The number increases the probability of another increase in May, because it should trigger upward revisions in inflation forecasts for this year,” Dos Santos, principal economist at Banco Bilbao Vizcaya Argentaria and the second most-accurate Selic forecaster according to data compiled by Bloomberg, said by phone. “It will trigger discussion about whether inflation will end the year lower or higher than 6.5 percent, which is the ceiling of the target range.”

Biggest Factor

Swap rates on the contract due in January 2017, the most traded in Sao Paulo today, rose 9 basis points, or 0.09 percentage point, to 12.26 percent at 3:59 p.m. local time. The Ibovespa stock index slipped 1.1 percent.

The biggest factor in the quickening of inflation was food and beverages, which rose 1.92 percent and accounted for more than half the monthly gain, the statistics agency said in today’s report. Transport prices climbed 1.38 percent as airfare surged 26.5 percent following a 20.6 percent decline in February.

“Rising food prices have received a lot of media attention,” Alberto Ramos, chief Latin American economist at Goldman Sachs Group Inc., wrote in a note e-mailed to investors today. “However, we highlight that the inflationary pressures are quite generalized and disseminated throughout the economy.”

Monetary Policy

Central bank President Alexandre Tombini’s nine interest rate increases since April 2013 are the most among the 49 central banks tracked by Bloomberg, with the total tightening of 375 basis points trailing only Turkey among major economies. He halved the pace of increases to 25 basis points in his last two meetings following six straight half-point increases.

The biggest impact from raising the Selic has yet to materialize on consumer prices, Tombini said at a Senate hearing last month. The effects of monetary policy on inflation are cumulative and appear with delay, while a jump in fresh food prices may be temporary, he said.

Policy makers in the statement accompanying this month’s rate increase inserted a new paragraph saying they would monitor the economic outlook when deciding their monetary strategy in next month’s meeting. They also injected language that they had decided to raise interest rates “at this moment.”

‘Bring Comfort’

Analysts polled on April 4 by the central bank estimate Tombini will raise interest rates only once more this year, leaving it at 11.25 percent.

“We are working with projections in terms of inflation that should show some decline in April, but not that much in order to really bring comfort to the Brazilian central bank,” Jankiel Santos, chief economist at Banco Espirito Santo de Investimento, said by phone from Sao Paulo. “There should be another increase, a final one, in May.”

The central bank at the start of the year extended for six months a program to bolster the currency after it depreciated 13 percent in 2013, offering as much as $200 million in foreign exchange swap auctions daily through at least June 30. The real, which increased 0.1 percent to 2.2004 per U.S. dollar, has appreciated 7.4 percent in 2014.

Analysts in the central bank’s April 4 poll estimate Brazil’s currency will weaken to 2.45 per dollar by the end of 2014 as inflation reaches 6.35 percent. Policy makers target 4.5 percent inflation, plus or minus 2 percentage points.

Approval Rating

The government’s approval rating fell to 36 percent last week from 41 percent in February as an increasing number of respondents said they expect inflation to accelerate and purchasing power to shrink, according to a survey by public opinion research company Datafolha. The April 2-3 survey of 2,637 people was released April 5 and has a margin of error of plus or minus 2 percentage points.

Prices regulated by the state rose 3.4 percent in the 12 months through March compared to 3.7 percent in February. The government will have to let the prices on items such as energy and fuel rise further to help shore up fiscal accounts and boost state-run oil company Petroleo Brasileiro SA’s revenue, according to Arminio Fraga, partner and founder of Gavea Investimentos.

“It’s a matter of when, not whether, it’s done,” Fraga, a former central bank president, said by phone April 3. “It’s a bit of an illusion to think you can just keep postponing these things forever. It cannot be done, and it should not be done.”

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