Brazil’s consumer prices in February rose at the slowest pace in four months on falling transportation and clothing costs, supporting the central bank’s decision to accelerate the pace of interest-rate cuts.
Prices, as measured by the benchmark IPCA (BZPIIPCM) index, rose 0.45 percent in February, from 0.56 percent in the previous month. The result matched the 0.45 percent median estimate of 51 analysts surveyed by Bloomberg.
Brazil’s central bank surprised analysts this week by speeding up the pace of interest rate cuts, after gross domestic product and industrial output data were weaker than expected. Policy makers cut the benchmark rate 0.75 percentage point, following four half-point cuts since August.
“The inflation number strengthens the position of the central bank,” said Luis Leal, chief economist of Banco ABC Brasil SA, in a telephone interview from Sao Paulo. “If you compare it with the bank’s expectations for the first quarter, it made reasonable headway on annual inflation, according to its model.”
Annual inflation slowed for a fifth straight month, to 5.85 percent, from a six-year high of 7.31 percent in September. The annual number was the lowest since November, 2010. The government targets consumer price increases of 4.5 percent, plus or minus two percentage points.
Transportation costs fell 0.33 percent and clothing prices were down 0.23 percent, while education surged 5.62 percent in February.
‘Focused on Growth’
President Dilma Rousseff’s government is trying to maximize economic growth as much as is consistent with keeping inflation below the 6.5 percent upper limit of its target range, said Flavio Serrano, senior economist at Espirito Santo Investment Bank in Sao Paulo.
“We are likely to see inflation going higher,” Serrano said in a telephone interview yesterday. “They said, though not clearly, forget about inflation, we are focused on growth.”
Traders are betting that central bank President Alexandre Tombini will cut the rate to at least 8.75 percent by July, from 9.75 percent, according to Bloomberg estimates based on interest rate futures contracts.
The yield on the interest rate futures contract maturing in January 2014, the most traded in Sao Paulo today, fell four basis points, or 0.04 percentage point to 9.26 percent at 10:59 a.m. Brasilia time. The real declined 0.5 percent to 1.7693 per dollar.
Espirito Santo raised its 2013 inflation forecast to 5.8 percent, from 5.3 percent, after the interest rate cut, and held its inflation forecast for this year at 5.3 percent.
Consumer prices will rise 5.24 percent this year and 5.2 percent in 2013, according to a March 2 central bank survey. The economists who took part in the survey expect inflation to remain above the 4.5 percent target until 2016.
Annual core inflation was 6.2 percent in February, ABC’s Leal said.
The government’s concern over the appreciation of the real may also have been a reason for the faster interest rate cuts, said Gustavo Rangel, chief Brazil economist for ING Financial Markets in New York. The currency has strengthened 5.6 percent against the dollar this year.
Rousseff, on a trip to Germany this week, said her government would spare no effort to protect manufacturers from a “monetary tsunami” triggered by loose credit conditions in rich nations.
“They clearly choose to prioritize the currency over inflation,” Rangel said in a telephone interview yesterday.
Brazil’s economy grew 2.7 percent last year, its second- weakest performance since 2003, while industrial output suffered its biggest drop in three years in January, according to data published this week by the national statistics agency.
Consumer demand is being sustained by unemployment close to record lows, a 14 percent increase in the minimum wage this year, and credit growing at an 18 percent annual pace.
Unemployment was 5.5 percent in January, a record low for the month, from 6.1 percent a year earlier. In the minutes to its January policy meeting, the central bank said the tight labor market is an “important risk” for inflation.
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