Bloomberg News

Brazil’s Inflation Accelerated in August Ahead of Rate Cut

September 06, 2011

(Updates with installed capacity in 14th paragraph.)

Sept. 6 (Bloomberg) -- Brazil’s inflation accelerated for the 12th straight month in August to its fastest annual rate since 2005, reinforcing economist views that the central bank may have cut borrowing costs prematurely.

Consumer prices, as measured by the IPCA index, rose 0.37 percent in August from the previous month, the national statistics agency said today. That was in line with analyst expectations for a 0.36 percent increase, according to the median estimate of 40 analysts surveyed by Bloomberg. Prices rose 7.23 percent from a year ago, the highest since June 2005.

“Inflation is worrying, mostly in the long run with elevated service prices growth,” Mauricio Rosal, chief economist at Raymond James in Sao Paulo, said in a telephone interview. “It will be harder for the central bank to bring inflation down to its target because it’s at such a high rate.”

Policy makers led by central bank President Alexandre Tombini cut the benchmark interest rate to 12 percent on Aug. 31, after raising it at the previous five policy meetings, in the most abrupt turnaround in monetary policy since 1999. The bank said a “moderate adjustment” in the key rate wouldn’t compromise its 4.5 percent inflation target next year because of a “substantial deterioration” in the global economy.

‘Gradual Reduction’

“We’re still a long way from converging to the target,” said Daniel Lima, an analyst at Rosenberg & Associados, in a telephone interview from Sao Paulo. “It will be a gradual reduction.”

Yields on the interest-rate futures contract due in January 2013 fell four basis points to 10.54 percent at 10:03 a.m. New York time. The real weakened for the fourth straight session, falling 0.7 percent to 1.6564 per U.S. dollar.

World stock markets lost more than $4 trillion last month as Europe tried to stave off a debt crisis and global growth showed signs of slowing. Amid a worsening outlook for the U.S. economy, policy makers in emerging markets have been shifting their focus away from inflation. Demand for Brazil’s iron ore, the country’s biggest export, is also expected to slacken.

Last week’s rate cut prompted analysts covering the Brazilian economy to increase their inflation forecasts for next year and 2013.

Core Inflation Rises

Consumer prices will rise 5.32 percent next year, according to the median forecasts in a central bank survey of about 100 economists published yesterday. The forecasts were up from 5.2 percent the previous week. The benchmark Selic rate will fall to 11.88 percent by the end of 2012, the survey found.

Core inflation rose 0.42 percent in July, from 0.37 percent in June, and should continue to rise in coming makes, making further cuts unadvisable, Flavio Serrano, an analyst for Espirito Santo Investment Bank, said in a report.

The increase in prices last month was the biggest since a 0.47 percent rise in May. Food prices rose for the first time since May, jumping 0.72 percent last month. Transportation costs fell 0.11 percent. Clothes prices rose 0.67 percent, while housing increase 0.32 percent and household goods jumped 0.57 percent.

Tombini has said that the pace of price increases will start to slow in September.

Slower Growth

Brazil’s economic growth slowed last quarter the most since its 2009 recession, growing 3.1 percent from a year earlier. Growth was led by a 4.9 percent expansion in the retail sector, while imports surged 14.6 percent after the real hit a 12-year high during the quarter.

A new report today showed that manufacturers reduced production in July. Installed capacity fell to 82.1 percent, its lowest level since February 2010 and down from 82.4 percent in June.

While inflation has shown signs of slowing, rising wages are still bolstering demand. Unemployment fell to 6 percent in July, its lowest level this year, and salaries for autoworkers have risen as much as 20 percent in recent weeks. The country’s minimum wage, which is used to adjust pension payments, is slated to rise 14 percent next year.

President Dilma Rousseff is counting on further rate cuts this year and has told the central bank she will reinforce fiscal measures to pay for the shift in monetary policy, Folha de S. Paulo reported today, citing advisers it did not name.

Rousseff considers it a good moment to bring rates down to the level of developed nations, which would help convince lawmakers to limit public spending, according to the newspaper.

‘Rigorous Strategy’

“There can be no doubt about us continuing our rigorous strategy of containing inflation,” Finance Minister Guido Mantega said in an interview in Sao Paulo on Sept. 2.

Government efforts to contain spending will assist the central bank in its inflation fight and complement a “more active” use of monetary policy, Mantega said. The government last month raised by 10 billion reais its budget surplus before interest payments target this year, and President Dilma Rousseff’s administration has no plans to increase salaries for federal government employees in 2012, he said.

While members of Congress are seeking additional funds for health care and want to lift police wages, Mantega said the government won’t support any spending increases unless lawmakers identify offsetting revenue sources.

--With assistance by Tais Fuoco and Helder Marinho in Sao Paulo, Matthew Bristow in Brasilia. Editor: Richard Jarvie, Joshua Goodman

To contact the reporter on this story: Alexander Ragir in Rio de Janeiro at aragir@bloomberg.net.

To contact the editor responsible for this story: Joshua Goodman at jgoodman19@bloomberg.net


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