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Brazil’s central bank President Alexandre Tombini said inflation will converge to the bank’s 4.5 percent target in the third quarter of 2013 even as new data showed the pace slowing less than expected.
Inflation remains “under control” and falling wholesale prices “are expected to be reflected in consumer prices in the coming months,” Tombini said in a congressional hearing today.
Inflation, as measured by the IPCA-15 index, reached 5.64 percent in the year through mid-November, up from 5.56 percent a month earlier, the national statistics institute said today in Rio de Janeiro. Consumer prices in the month through mid-November gained 0.54 percent, compared with a 0.51 percent median estimate from 36 analysts surveyed by Bloomberg. Mid-month inflation was 0.65 percent the month prior.
The central bank has cut Brazil’s benchmark lending rate by 525 basis points since August 2011, more than any other Group of 20 nation, to a record 7.25 percent, and has pledged to keep the rate low for a “prolonged period.” At the same time, President Dilma Rousseff’s administration has pushed commercial banks to reduce borrowing costs, lowered taxes on consumer and industrial goods and cut bank reserve requirements to spur lending as the economy struggles to pick up speed.
Swap rates on the contract maturing in January 2014, the most traded in Sao Paulo today, fell three basis points, or 0.03 percentage point, to 7.33 percent at 12:29 p.m. local time. The real strengthened 0.4 percent to 2.0908 per U.S. dollar.
The increase in prices was driven by higher transport and clothing costs, while pressure on food prices began to ease in the world’s second-largest emerging market.
“The only groups slowing down are food, which was the most important, and then housing and health,” David Beker, chief Brazil economist for Bank of America Merrill Lynch, said in a telephone interview from Sao Paulo. “All other groups accelerated. And, despite the slowdown, food is still running pretty high.”
Food and beverage prices rose 0.83 percent in the month, after leaping 1.56 percent in the month through mid-October because of droughts in the U.S. and Brazil. Rice gained 6.6 percent, down from 11.9 percent, while potato prices fell 4.45 percent, following an increase of 19.2 percent.
“There are some hopeful signs that food inflation, at least in month-on-month terms, may now be easing back,” Neil Shearing, chief emerging markets economist at Capital Economics Ltd., said by telephone from London. “The annual rate of inflation is going to climb a bit from here, but the monthly rates of inflation seem to have peaked.”
Higher prices for fuel and plane tickets pushed up the cost of transport, which increased 0.5 percent through mid-November, Alexandre Barbosa, chief economist at Banco Cooperativo Sicredi, said by telephone from Porto Alegre.
Prices of apparel increased 1.4 percent through mid-November after rising 1.05 percent the month before.
Prices as measured by the IGP-10 index, which is 60 percent weighted in wholesale prices, fell 0.28 percent in the month through Nov. 10, the Getulio Vargas Foundation said last week. Wholesale prices in the index slid 0.57 percent, while consumer prices were up 0.36 percent.
Economists reduced their forecast for Brazil’s 2012 inflation this week to 5.45 percent, according to a central bank survey of about 100 analysts. They have cut their forecasts for economic expansion in 2012 repeatedly, most recently to 1.52 percent, following annualized growth rates of 0.5 percent and 1.6 percent in the first and second quarters.
Brazil’s economy expanded at a 4.7 percent annualized rate in the third quarter, and will continue apace into 2013 and coming years, Deputy Finance Minister Nelson Barbosa said on Nov. 19. Barbosa said the economy can grow while containing inflation.
Some economists remain doubtful that inflation will slow to target as Tombini forecasts.
“At no time during 2013 do I forecast inflation below 5 percent,” Ines Filipa, chief economist at ICAP Brasil, said in a phone interview on Nov. 21. “That ’convergence’ to the 4.5 center of the target, even non-linear as the central bank likes to say, is far from occurring in 2013 and also in 2014.”
Inflation faster than the central bank’s target is unlikely to spur policy makers to raise the benchmark Selic rate in the near term, particularly with cuts to electricity tariffs scheduled to come into effect in January, tempering annual inflation, Capital Economics’ Shearing said.
“When needed, we will make adjustments in our instruments, whether up or down, to attend to what is defined in our inflation targeting regime,” Tombini said.
A strong jobs market has sustained consumer demand. The unemployment rate, which has remained near historic lows all year, fell to a record 5.3 percent for the month of October from 5.4 percent in September, the agency said today. While retail sales have increased for four straight months, the economy’s response to the stimulus measures has been uneven, as reflected by a 1 percent drop in industrial production in September.
“Inflation is still very high,” Alexandre Barbosa said. “The labor market is still very heated. Inflation is concerning for the coming months.”
Tombini also said the bank remains ready to intervene in currency markets, while it has no set range for the real’s value.
“If needed, we will also intervene in the temporary supply of liquidity at the turn of the year,” he said.
Brazil’s real fell to a three-year low yesterday after President Dilma Rousseff told Sao Paulo-based newspaper Valor Economico the currency is “overvalued,” spurring speculation that the government will allow it to depreciate further. The currency slid 0.9 percent to 2.0985 per dollar at the close in Sao Paulo, the weakest level since May 2009.
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