Brazil Central Bank Warns of Persisting Inflation, Rate Hike

(Bloomberg) -- Brazil’s central bank said inflation pressures could persist in the beginning of the year, eventually leading to an interest rate hike, after a report showed consumer prices surged in December by the most since 2003.

While reaffirming that a record-low rate of 2% is adequate for now, Monetary Policy Director Bruno Serra said Brazil shouldn’t have such a level of monetary stimulus in normal circumstances, when the economic impact of the pandemic subsides. Inflation jumped 1.35% in December from the month prior, topping all estimates in a Bloomberg survey, the nation’s statistics bureau reported earlier on Tuesday.

“We have an extraordinarily high degree of monetary stimulus and this will be normalized,” Serra said in a event with investors. “It’s natural to understand that stimulus will be withdrawn. This debate regarding higher rates, which is already happening in financial markets, will be held by the central bank at some point.”

Latin America’s largest economy is getting pummeled by faster-than-forecast inflation that the central bank has repeatedly described as transitory. Prices are rising due to factors including a weak currency, the lingering effects of emergency government spending and higher costs of goods such as oil. Put together, interest rate future traders see borrowing costs rising as early as March.

Read More: Brazil Risks Losing Grip on Inflation, Ex-Central Banker Warns

What Bloomberg Economics Says

“The rise in diffusion and core inflation -- if sustained over the coming months -- raises a yellow flag, and could lead the Brazilian central bank to unwind part of the monetary stimulus well before the economy is back to its feet. The evolution of the pandemic, the effect of the end of cash handouts and the fate of the currency will all weigh on the near-term inflation outlook and influence the bank’s decision.”

--Adriana Dupita, Latin America Economist

Swap rates on the contract due in January 2023, which indicate investor expectations for monetary policy, rose as much as 13.5 basis points in the morning before paring gains in early afternoon trading. The real gained 1.1% to 5.4461 per dollar.

Hike Soon

Serra said inflation is being driven in part by rising commodity prices. Saudi Arabia has announced oil production cuts, while climate change is sending grain prices higher, he said.

Brazil’s food and beverage costs rose 1.74% on the month after surging 2.54% in November, according to the national statistics agency. Housing costs jumped 2.88% during the period while household goods increased 1.76%.

Separately, a broader measure of inflation known as IGP-M surged 1.89% during the first ten days of January, again topping all forecasts in a Bloomberg survey, the Fundacao Getulio Vargas reported earlier on Tuesday. The real has also tumbled by roughly 7% in the past month, the most in emerging markets.

“The IPCA inflation data together with the IGP-M reading today sets the tone for the central bank to start lifting the key rate soon, between the first and second quarter,” said Andre Perfeito, chief economist at Necton Investimentos. “Rates should end the year at 4% at the least.”

Some economists expect annual inflation to continue accelerating toward 6% in the first half of the year before converging toward the 2021 target of 3.75%. That could reduce policy makers’ urgency to start raising rates.

For now, analysts expect the central bank to hold borrowing costs at 2% at its first policy meeting of the year next week.

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