Bloomberg News

Brazil Inflation Goal May Be Nearer as Price Index Altered

November 29, 2011

(Updates to add Itau, Goldman Sachs 2012 inflation forecasts in 10th-14th paragraphs.)

Nov. 29 (Bloomberg) -- A change in the way Brazil gauges inflation will help the central bank near its targets, enabling it to keep cutting interest rates, said Guilherme Figueiredo, hedge fund director at M. Safra & Co.

Figueiredo’s fund trimmed its 2012 inflation forecast to 5.35 percent from 5.65 percent, after the national statistics agency yesterday released new weightings for items in its benchmark IPCA price index, he said.

Yields on interest rates futures show investors expect the central bank to cut the overnight rate for a third straight time by a half-point to 11 percent this week. While the re-weighting of the IPCA index will help policy makers bring inflation closer to their 4.5 percent target for 2012, Figueiredo doesn’t see the changes speeding up bank President Alexandre Tombini’s policy of “moderate” interest rate cuts.

The new weights “give the central bank more room to continue cutting interest rates,” Figueiredo, who manages $1.5 billion, said in a phone interview from Sao Paulo.

He called the changes in the index “legitimate” because they were based on a survey that shows adjustments in consumers’ spending patterns. “Coincidently, it took weight from items that had bigger price increases,” Figueiredo said.

Slowing Down

The central bank has cut interest rates as the European debt crisis threatens to crimp global growth. Economists in a Nov. 25 central bank survey cut their 2011 Brazil economic growth forecast to 3.1 percent, from the previous week’s forecast of 3.16 percent, according to the median estimate of about 100 economists. At the end of August, analysts were predicting growth of 3.79 percent.

Third-quarter Brazilian business confidence fell to its lowest level since the start of 2009.

The yield on the interest-rate future contract due January 2013 fell nine basis points, or 0.09 percentage point, to 9.68 percent yesterday on speculation that the changes will rein in inflation, which has exceeded the 6.5 percent upper limit of the government’s target range since April.

The yield on the contract rose one basis point to 9.69 percent at 1:20 p.m. Brasilia time after inflation, as measured by the IGP-M price index, rose more than analysts expected.

Rate Horizon

Itau Unibanco Holding SA, Latin America’s biggest bank by market value, estimates the new weights for the IPCA will reduce next year’s inflation by half a percentage point to 5.25 percent.

The impact of the statistical change increases the chance that the central bank will step up the pace of rate cuts at some point, the bank said in an e-mailed report to clients.

Goldman Sachs Group Inc. may trim its 2012 inflation forecast by as much as 0.3 percentage point to 4.9 percent, Paulo Leme, the bank’s head of emerging markets, wrote in a note to clients.

To be sure, Leme said the statistical change is neutral for the central bank’s policy because it doesn’t alter the “determinants” of inflation.

“The economy is slowing faster than anticipated and the risk of negative external shocks is rising,” Leme said in the note to clients. The central bank “may end up lengthening the easing cycle.”

Breakeven rates, the difference between yields on 2015 inflation-linked and fixed rate bonds, show traders are betting on average inflation of 5.55 percent over the next four years, down from 6.197 percent at the end of September.


The weights published yesterday are not final and may be adjusted, said Eulina Nunes, coordinator of the IPCA index at the Rio de Janeiro-based statistics agency, IBGE.

The agency reviews the weight of items in its basket every five years to better reflect family consumption patterns detected by its surveys, she said. The weighting of cable TV and consumer electronic goods will increase in the consumer-price basket, while that of cigarettes will decline, Nunes said.

Following the new weightings, Espirito Santo Investment Bank may also trim its 2012 inflation forecast by 30 basis points to 5.6 percent, chief economist Jankiel Santos said in a phone interview from Sao Paulo.

“The change in methodology is justifiable and is part of the game,” Santos said. Brazil isn’t manipulating the inflation figures, he said.

‘Flight Plan’

The central bank won’t alter its strategy of reducing rates by half a point based on the new criteria, said Andre Perfeito, chief economist at Sao Paulo-based Gradual Investimentos. He expects policy makers to lower the key rate to 10 percent by March.

“They already had a flight plan and will stick to it,” Perfeito said.

Analysts were initially expecting the update to the consumer price-basket to trim inflation by as much as 0.2 percentage point, Deputy Finance Minister Nelson Barbosa said Nov. 22.

“Since people typically begin to switch out of the products with the most inflation and use other products, the goods that saw a bigger price increase are reduced in the index,” Barbosa said yesterday. “That’s why it typically causes a reduction in inflation,” he said.

--With assistance Carla Simoes, Raymond Colitt and Mario Sergio Lima in Brasilia and Alexander Ragir in Rio de Janeiro. Editors: Robert Jameson, Philip Sanders

To contact the reporter on this story: Andre Soliani in Brasilia at; Ye Xie in New York at

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

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