Brazil Inflation Exceeded Target Range in April for First Time Since 2005

Brazil’s benchmark inflation rate in April exceeded the upper limit of the government’s target range for the first time since 2005.

Consumer prices, as measured by the IPCA index, rose 6.51 percent in April from the same month a year earlier, up from 6.3 percent in March, the national statistics agency said today in a report distributed in Rio de Janeiro.

Monthly inflation unexpectedly slowed to 0.77 percent, the lowest level since December, the agency said. Economists had expected prices to rise 0.84 percent from 0.79 percent in March, according the median of 39 forecasts in a Bloomberg survey.

“The figures are a little bellow what we expected, yet one cannot celebrate, inflation in last 12 months remains horrible,” said Flavio Serrano, senior economist at Espirito Santo Investment Bank. “The central bank will raise interest rates by 25 basis points in each of the next two meetings before stopping, as fuel prices may begin to fall as the harvest of sugarcane continues.”

As the inflation outlook worsens in Latin America’s largest economy, the central bank has raised the benchmark rate three times this year to 12 percent and said it will continue tightening at a slower pace for a longer period than initially planned, according to the minutes of its April 19-20 meeting. Central Bank President Alexandre Tombini yesterday told lawmakers that “robust” domestic demand is pressuring the price of services even as high commodity costs fuel inflation around the globe.
‘Robust’ Demand

In testimony before Congress, Tombini said he expects monthly inflation to start slowing in May to a level in line with the bank’s year-end goal. The government targets inflation of 4.5 percent plus or minus two percentage points.

“The moderation of monthly inflation to be observed from now on should make the central bank feel comfortable with one last 25 basis-point hike of the Selic in June,” Enestor dos Santos, senior Brazil economist for BBVA in Madrid, said in a note to clients today. “However, additional 25 basis-points hikes cannot be ruled out if inflation moderation proves to be weaker than expected.”

Gasoline prices jumped 6.26 percent in the month, helping to fuel a 1.57 percent increase in transportation costs that outpaced price increases of all other items, the agency said. Food prices rose 0.58 percent, less than the 0.75 percent jump in March.
Above the Target

It was the first time 12-month inflation as measured by the IPCA exceeded the government’s target since June 2005, when prices jumped 7.27 percent from a year ago.

The yield on the interest-rate future contracts fell across the board. The contract due in January 2013, the most traded in Sao Paulo today, fell seven basis points, or 0.07 percentage point, to 12.57 percent at 9:20 a.m. New York time. The real rose 1.2 percent to 1.6030 per U.S. dollar.

Brazil’s economic activity index, a proxy for gross domestic product, rose 6.98 percent in February from the same month a year earlier, its fastest pace since August. Latin America’s biggest economy grew “a little more” than 4 percent in the first quarter, Finance Minister Guido Mantega said April 18 in New York.