Brazil Inflation Unexpectedly Quickens to Fastest Since 2003

  • January inflation exceeds all forecasts from economists
  • Lawmakers fast-tracking central bank independence bill

Brazil’s annual inflation rate unexpectedly accelerated in January after a controversial central bank decision to keep interest rates unchanged last month. Swap rates jumped.

The benchmark IPCA consumer price index rose 10.71 percent in 12 months through January, the fastest since November 2003. Thirty-six economists surveyed by Bloomberg expected inflation to slow to 10.52 percent. Inflation was 1.27 percent in January -- more than all forecasts -- compared to 0.96 percent in December.

The data surprised economists who expected inflation to have peaked in December following a spike last year that routed consumer confidence. Latin America’s largest economy is forecast to contract for two consecutive years, and the central bank invoked weaker economic activity as well as external uncertainties to justify its decision not to raise the benchmark rate last month. Analysts said the move dented the institution’s credibility as an inflation fighter.

“This is bad news for the central bank, and puts the bank against the wall,” Enestor dos Santos, principal economist at Banco Bilbao Vizcaya Argentaria SA, said by phone from Madrid. “They will have more problems conveying their message because they were expecting inflation to converge to the target range this year. Taking today’s figure into account, this is much less likely to happen.”

Swap rates on the contract due January 2017 rose 10 basis points to 14.63 percent at 10:33 a.m. local time. The real weakened 0.2 percent to 3.8978 per U.S. dollar. It has dropped about 30 percent in the past year, the worst performer among 16 major currencies tracked by Bloomberg, which has pressured inflation by boosting the cost of imports.

Food and beverage prices rose 2.28 percent in January, the highest monthly print since December 2002, after a 1.5 percent increase in December, the statistics agency said in its report. Personal expenses rose 1.19 percent after a 0.57 percent increase. The cost of transport rose 1.77 percent from 1.36 percent the prior month.

Bank Autonomy

After taking over as finance minister, Nelson Barbosa said the central bank has and will continue to have full autonomy to manage the key rate in order to slow inflation to the official goal of 4.5 percent a year. But the central bank’s decision to stay put last month left some lawmakers worried that its president, Alexandre Tombini, and his board are bowing to mounting political pressure. That spurred the Senate to fast-track a proposal that would give the monetary authority formal independence.

Even with inflation in the double-digits, a member of President Dilma Rousseff’s economic team said in a recent interview it is possible for Brazil to reduce borrowing costs as early as this year. Andre Perfeito, chief economist of Gradual Investimentos, is one analyst expecting the central bank to lower the benchmark Selic rate this year.

“The IPCA data released today reinforces that view despite coming in very high,” Perfeito wrote in a research note Friday. “As the price increases were due to groups like food, transport and personal expenses, it is clear that the Selic would have little efficiency in those areas.”

The bank’s latest monetary policy decision also prompted a jump in short- and medium-term inflation expectations. Analysts surveyed weekly by the central bank abandoned their forecast for inflation to slow to the 4.5 percent target in 2019. Now they don’t even see that happening by 2020 -- the last year for which they make projections.

Economists predict inflation will slow to 7.26 percent by year-end. That would be the second consecutive year that it remains above the ceiling of the government target, which includes a tolerance band of plus or minus 2 percentage points. In their most recent quarterly inflation report, policy makers pledged to “adopt the necessary measures to ensure” inflation slows to within the target range this year and to the center of that target in 2017.

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