Brazil Inflation Nearly Twice Target Clouds Easing Outlook

(Bloomberg) -- Brazil’s annual inflation in August accelerated to nearly double the central bank target as policy makers ponder when to cut the key interest rate for the first time since 2012.

The benchmark IPCA consumer price index accelerated to 8.97 percent in the year through August, from 8.74 percent in July, the national statistics agency said on Friday. While the monthly reading of 0.44 percent was in line with analyst expectations and less than the 0.52 percent gain the prior month, it was also the highest print since 2007 for August, historically a month for low inflation.

Brazil’s annual inflation remains far from the official 4.5 percent target and economists forecast it will fall short next year as well. That has prevented the central bank’s board from cutting the benchmark interest rate from its 10-year high. The timing of key rate cuts also hinges on President Michel Temer’s efforts to pass fiscal austerity measures that could help slow consumer price increases, according to Carlos Kawall, chief economist at Banco Safra.

“The markets need to have clear proof that reforms will move forward, and I think this is more likely to happen by the November meeting rather than the October meeting,” Kawall said by phone. The central bank’s board “is also tracking inflation itself, and we’re seeing today that inflation is still very persistent.”

Swap rates on the contract due in January 2018, a gauge of expectations for Brazil’s interest rate moves, rose 0.10 percentage point to 12.56 percent at 10:58 a.m. local time. The real dropped 1.8 percent to 3.2733.

Food and beverage prices increased 0.3 percent in August, following a 1.32 percent surge the previous month. There were some one-time increases to inflation in the month, including an 111 percent spike in Rio de Janeiro hotel prices associated with its hosting of the Olympic games.

Still, Kawall pointed to inflation components such as new cars, which saw prices spike 0.95 percent in August after two consecutive declines, as proof that waning food price pressure is being offset by other items.

The bank’s board has signaled it won’t cut borrowing costs to stimulate economic growth until it has greater confidence it will reach the inflation target. The institution’s president, Ilan Goldfajn, said in an interview Thursday that investor perception of risk in the Latin American country will be a key factor in his decision to ease monetary policy.

When Temer’s fiscal adjustment is on the right track, “you’ll immediately see that Brazil’s country risk -- as measured by credit default swaps, the Emerging Markets Bond Index and risk premium -- will fall,” Goldfajn said. "Inflation expectations will improve, and all that will give me a signal that we are addressing the fiscal question."

Analysts surveyed by the central bank are optimistic that consumer inflation will cool enough this year and next to allow for reductions in borrowing costs. Policy makers will cut the key rate by more than 3 percentage points by the end of 2017, when the economy will rebound from a two-year recession, according to the survey. Their inflation forecast for 2017 is still above target, at 5.12 percent.

“Parts of core inflation are starting to moderate, but it’s not yet widespread,” Neil Shearing, chief emerging markets economist at Capital Economics Ltd., said by phone. “Based on their trigger points for easing, we don’t really have the evidence to support the idea that now is the time to start lowering rates.”