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Brazil Says Too Costly to Bring Inflation to Target in 2012

September 27, 2012

Brazil’s central bank said that it’ll miss its inflation target for a second straight year as policy makers focus on spurring a recovery in the world’s second-biggest emerging market.

The bank’s economic policy director, Carlos Hamilton, said today that a spike in commodity prices means that inflation is unlikely to converge to the 4.5 percent target until the third quarter of 2013. As recently as July, bank President Alexandre Tombini said inflation would slow to the midpoint of the 2.5 percent to 6.5 percent range by year-end despite a jump in food prices.

“If you fight against a spike in inflation there is a cost in terms of activity,” Hamilton told reporters in Brasilia. “We would have three months to turn it around. Theoretically, this would imply a cost that is too high.”

Hamilton’s comments came after policy makers said in a report today that government tax breaks and spending packages to revive growth are contributing to inflation, limiting the room for additional monetary stimulus. Any future interest-rate cut must be carried out with “maximum parsimony,” the bank said, reiterating language used at its August meeting, when it lowered the Selic rate by a half-point to a record 7.5 percent.

Since August 2011, policy makers have cut the benchmark rate by 500 basis points to revive economic growth. The government has also trimmed taxes on company payrolls and consumer goods, reduced bank reserve requirements and announced a plan to cut electricity costs.

Supply Shocks

The pace of inflation in the world’s second largest emerging market quickened for a third straight month through mid-September, to 5.31 percent, even as economic growth remained sluggish. Economists surveyed by the central bank have increased their 2012 inflation forecasts 11 weeks in a row as droughts in Brazil and abroad have driven up food costs.

Such price shocks are “events that are not foreseeable,” Hamilton said, adding that “it wouldn’t make sense” to raise borrowing costs now to try and contain such pressures.

The argument echoes one used by the monetary authority in March 2011, when it cited supply shocks amid a period of depressed growth as the reason for abandoning its inflation target for the end of that year.

The bank’s report today said that fiscal policy aimed at reviving an economy that expanded less than Japan and the U.S. in the second quarter has shifted from a neutral to “slightly expansionary” position.

“Certainly the space for rate cuts has shrunk,” Hamilton said.

Growth Forecast

The bank raised to 5.2 percent its forecast for inflation this year, from 4.7 percent in its June report. While the bank lowered its growth forecast for 2012 to 1.6 percent, from 2.5 percent in June, the economy will grow 3.3 percent in the second quarter of 2013, the report said.

“They are paving the way for rates to be kept on hold next month,” Neil Shearing, chief emerging markets economist at Capital Economics Ltd., said in a telephone interview from London. “There is a definite shift in language. They are less concerned about growth and more concerned about inflation.”

After the bank issued its report and a gauge of price increases showed a pace faster than economists expected, traders reinforced bets that policy makers won’t cut interest rates at their next meeting in October.

Swap rates on the contract maturing in January 2013, the most traded in Sao Paulo today, rose one basis points to 7.27 percent at 2:34 p.m. local time. The real rose 0.3 percent to 2.0303 per U.S. dollar.

Brazil’s IGP-M price index, 60 percent of which is weighted in wholesale goods, rose 0.97 percent in September, the Getulio Vargas Foundation reported today. The median estimate from 33 economists surveyed was for a 0.94 percent increase.

Reacting Slowly

Since January, economists surveyed by the central bank have cut 2012 growth expectations by almost two percentage points, to 1.57 percent, as Brazil’s economy has reacted slowly to government stimulus.

Data from the third quarter signal that growth is accelerating, the central bank said today. Consumer confidence rose in August for the first time in five months. Retail sales in July beat economists’ forecasts and rose at the second- fastest pace since January, and vehicle sales reached a record high in August as Fiat SpA (F) and Hyundai Motor Co (005380) announced plans to build new assembly lines in Brazil.

Rising food prices and personal expenditures caused the pace of inflation to quicken for the third straight month to 5.31 percent through mid-September.

To contact the reporters on this story: Matthew Malinowski in Santiago at Raymond Colitt in Brasilia at

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

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