Bloomberg News

Tombini Forecast May Be Wrong as Prices Jump: Brazil Credit

September 21, 2011

(Updates to add central bank statement in ninth paragraph.)

Sept. 21 (Bloomberg) -- Brazilian central bank President Alexandre Tombini missed the first milepost in his plan to bring down inflation and cut interest rates at the same time.

Inflation in Latin America’s biggest economy accelerated to 7.33 percent in mid-September from 7.1 percent a month earlier, the government said yesterday. The increase goes against Tombini’s forecast Aug. 4 that the annual rate would peak in August as global economic growth slows.

The yield gap between two-year inflation-linked bonds and fix-rated securities, a gauge of investors’ expectations for price increases by 2013, jumped to 6.42 percentage points yesterday, the highest level since October 2008. The so-called breakeven rate was 5.86 percent Aug. 31, the day policy makers cut the benchmark Selic a half-point to 12 percent. The similar gauge for the U.S. rose 23 basis points, or 0.23 percentage point, this month to 1.39 percentage points and Mexico’s was unchanged at 3.77 percentage points.

“There’s no sign inflation is cooling even after commodity prices dropped because of the global slowdown,” said Luciano Rostagno, chief strategist at CM Capital Markets in Sao Paulo. “The central bank’s view that inflation will recoil beginning in September doesn’t seem to be coming true.”

Twice the Pace

With prices rising at twice the pace in mid-September as they did in mid-August, inflation this year may exceed the 6.5 percent upper limit of the bank’s target range for the first time since 2003. Tombini’s bet that a global slowdown will create space for lower borrowing costs is being offset by heated consumer demand, near record-low unemployment and an 11 percent drop this month in the currency, said Solange Srour, chief economist at BNY Mellon ARX Investimentos in Rio de Janeiro.

“Domestic fundamentals don’t bode well for a strong fall in inflation in the short term,” Srour said in a telephone interview. “It looks as if inflation will stay high in September even if the central bank is focusing on the external scenario. The bank’s credibility depends most on whether the slowdown abroad happens and affects the economy here.”

The yield on the overnight interest-rate futures show traders expect policy makers will lower benchmark borrowing costs by a total of 150 basis points, from 12 percent now, by the first half of next year, according to data compiled by Bloomberg. The central bank may start raising interest rates as soon as July, trading shows.

The central bank will have room to adopt an expansionary monetary policy if there is a further worsening of the global crisis, the Finance Ministry said today in its Brazilian Economic Outlook report. The ministry reiterated annual inflation will start slowing this month.

The central bank said in a statement today that inflation as measured by the 12-month IPCA rate will start decelerating more rapidly at the beginning of the fourth quarter.

‘More Comfortable’

Tombini said in a television interview on Aug. 4 that policy makers are “more comfortable” with inflation because consumer price increases will slow starting in September, with annual inflation falling two percentage points by April. A week later, at an event in Brasilia, he affirmed these projections, saying the annual inflation will show a “significant” drop starting in September and will converge with its 4.5 percent target by December 2012.

“That feeling inflation was out of control vanished,” Tombini said in Brasilia. “We’ve advanced in creating a solid fiscal policy, which will open space in the future, who knows, to rebalance the macroeconomic policies in a responsible way,” he said, without providing details about future policy shifts.

Extra Yield

The extra yield investors demand to own Brazilian government dollar bonds instead of U.S. Treasuries narrowed one basis point to 244 at 8:27 a.m. New York time, according to JPMorgan Chase & Co.

The real fell 1.9 percent to 1.8208 per U.S. dollar and touched the weakest level since June 2010. The yield on the overnight interest-rate futures contract due in January 2012 was little changed at 11.34 percent.

The cost of protecting Brazilian bonds against default climbed four basis points yesterday to 173, according to CMA. Credit-default swaps pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Brazil’s monthly inflation will be about 0.38 percent in the second half of this year, Tombini said Aug. 12 at an event in Sao Paulo. Inflation for the month through mid-September was 0.53 percent, twice the pace in the previous mid-month reading.

Tombini surprised all 62 analysts surveyed by Bloomberg on Aug. 31, when he cut Brazil’s benchmark interest rate a half point after raising borrowing costs at its five previous meetings. The turnaround in monetary policy was the most abrupt since 1999. The bank cited a “substantial deterioration” in the global economy.

Debt Crisis

Equity markets around the world declined during the past month on concern Europe’s debt crisis would threaten the global economy. The International Monetary Fund yesterday cut its forecast for global economic growth to 4 percent from a June estimate of 4.3 percent, and predicted “severe” repercussions if Europe fails to contain its debt crisis or if U.S. policy makers reach an impasse over a fiscal plan.

Slowing demand for exports have hit Brazil’s industrial sector, which shrank in July from a year earlier. Brazil’s economic growth slowed last quarter to 3.2 percent from a year earlier, down from 4.2 percent in the first quarter and a 7.5 percent pace last year that was the fastest in two decades.

Still, higher wages continue to bolster demand for consumer goods. Unemployment fell to 6 percent in July, its lowest level this year, fueling a 1.4 percent jump in retail sales in the month that was the biggest this year. The country’s minimum wage, which is used to adjust pension payments, is slated to rise 14 percent next year.

Bank Survey

Analysts covering Brazil’s economy estimate prices will keep rising next year and inflation will stay above the bank’s target through 2013, according to a central bank survey of 100 economists released Sept. 19. This year, consumer prices as measured by the IPCA index will rise 6.46 percent, the survey found.

“The rate decision last month was premature,” said Silvio Campos Neto, an economist at Tendencias Consultoria Integrada in Sao Paulo. “None of the economic factors support the move. It hurts the bank’s credibility.”

--With assistance from Andre Soliani in Brasilia, Tais Fuoco, Helder Marinho in Sao Paulo. Editors: Harry Maurer, Glenn J. Kalinoski

To contact the reporters on this story: Alexander Ragir in Rio de Janeiro at; Ye Xie in New York at

To contact the editors responsible for this story: David Papadopoulos at; Joshua Goodman at

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