Brazil Feb inflation slows, but nears target top

Inflation in Brazil slowed slightly in February but was still near the top of the government’s target range, highlighting how robust economic growth and rising global commodities prices will continue to challenge policymakers in coming months.

The main IPCA price index rose 0.8 percent last month, slightly below most analysts’ expectations. Inflation on an annual basis reached 6.01 percent, the first time the IPCA has pierced the 6 percent level at the end of a month since November 2008.

President Dilma Rousseff’s government announced major budget cuts this week and the central bank raised interest rates on Wednesday by 50 basis points as officials try to cool demand in Latin America’s largest economy and halt a recent increase in expectations for inflation.

The lack of major surprises in the February price data, released Friday by the government statistics agency IBGE, may allow the central bank to raise rates by another 50 basis points, rather than a bigger increase, at its next meeting on April 19-20.

Inflation is also highly seasonal in Brazil, as prices on items such as education increase at the beginning of the year, so pressures should ease a bit starting in March.

But a spike in global food prices earlier this year — worrying a number of governments — had already pushed annual inflation high enough to stoke worries that the central bank has not hiked rates far enough, fast enough to rein in prices.

“It’s also worth noting that there’s some risk from transportation prices, since alcohol and ethanol prices have continued rising,” LCA consultancy said in a note.

The government’s target for inflation is 4.5 percent, plus or minus 2 percentage points.

The central bank raised the country’s benchmark interest rate to 11.75 percent from 11.25 percent on Wednesday, despite some market bets for a hike to 12 percent.

REAL STRENGTH STILL AN ISSUE

Yields on Brazilian interest rate futures contracts moved little in early trading, with the yields on the contracts due July 2011 and January 2012 flat from late on Thursday.

The specter of inflation breaching the target range in a country that experienced runaway prices as recently as the 1990s has prompted the central bank to raise interest rates twice this year, most recently on Wednesday.

Economists in a weekly central bank survey released on Monday raised their forecast for the year-end IPCA for the 12th week in a row, to 5.8 percent.

On Thursday, after data showed the economy grew at its fastest pace last year since 1986, President Dilma Rousseff assured markets that the government would not let inflation spiral out of control this year.

Complicating Brazil’s fight against rising prices is the strength of its currency. The real firmed 4.6 percent against the dollar last year on top of a 34 percent jump in 2009. That has helped subdue inflation, but hurt industry, which has struggled to match the robust growth of other sectors.

Higher interest rates would add fuel to that currency rally because Brazil’s borrowing costs — among the world’s highest — draw investors from abroad chasing high yields.