Brazil’s Inflation Accelerates More Than Forecast in May

  • Inflation fueled by housing costs that jumped after April drop
  • Central bank expected to keep rates unchanged later on Wed.

Brazil’s consumer inflation accelerated more than analysts forecast in May on higher housing costs, as the market expects the central bank to keep interest rates on hold for a seventh consecutive meeting Wednesday.

The benchmark IPCA consumer price index climbed 0.78 percent after a 0.61 percent rise the previous month. That was higher than the median forecast for a 0.75 percent increase from 43 economists surveyed by Bloomberg. Twelve-month inflation was 9.32 percent, accelerating for the first time since January.

Brazil’s Senate on Tuesday approved the nomination of former Itau Unibanco Holding SA chief economist Ilan Goldfajn to assume the top post at the central bank. The market is betting that Brazil’s worst recession in decades and prospective spending cuts by Finance Minister Henrique Meirelles will make space for monetary easing this year. However, with inflation still more than double the target, traders don’t foresee that cycle beginning until July, at its earliest.

“It’s not the number the central bank would like to see; we resume the upward trend,” Pedro Tuesta, senior economist at 4Cast Ltd., said by phone from Washington. “But the market is looking forward at what Goldfajn is going to do, not what inflation is now. It’s looking at what Meirelles can do on the fiscal side to help Goldfajn cut rates.”

Housing prices jumped 1.79 percent, after a 0.38 percent decline in April, due to higher water, sewage and electricity prices. Food and beverage prices rose 0.78 percent, following a 1.09 percent jump in the previous month and marked their first deceleration in annual terms since September, to 12.74 percent. Price increases for services in the same 12-month period accelerated to 7.52 percent, from 7.34 percent previously.

“The complex and challenging inflation outlook and misaligned inflation expectations justify the current restrictiveness of monetary policy,” Alberto Ramos, chief Latin America economist for Goldman Sachs Group Inc., wrote in a note.

Brazil’s central bank will conclude its two-day monetary policy meeting on Wednesday, and economists surveyed by Bloomberg unanimously forecast directors will hold the benchmark Selic rate at 14.25 percent.

The central bank targets inflation of 4.5 percent, plus or minus two percentage points. It hasn’t fallen within that range since the end of 2014, which prompted the elevation of the benchmark rate to its highest level since 2006. That’s stifling activity, with the economy forecast to shrink 3.71 percent in 2016 following a 3.8 percent contraction last year, according to a weekly central bank survey.

“We’re going through the worst recession of Brazil’s history, with rising unemployment and considerable fiscal challenges,” Goldfajn said Tuesday during his confirmation hearing at the Senate Economic Affairs Committee. “But I fully trust that the internal scenario can be reversed”.

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