Inflation in Brazil ended 2013 higher than expected after surging in December, stymieing President Dilma Rousseff's hopes that a flurry of aggressive interest rate hikes and tax breaks for key industries would tame consumer prices.
The IPCA consumer price index rose 5.91 percent in 2013, up from 5.77 percent in the 12 months through November, statistics agency IBGE said on Friday.
That was also well above market expectations for an increase of 5.82 percent, according to the median forecast of 22 economists in a Reuters poll. Stubbornly high inflation poses a major challenge for Rousseff, who plans to run for re-election in October.
If the central bank raises rates too much, it could send the economy into a recession; if not, price increases could dampen consumer confidence and even rekindle street protests as seen last year.
Seeking to put a positive spin on the numbers, Rousseff touted the "historic" fact that inflation has averaged less in her first three years in office than in the equivalent period under her two predecessors - a comparison some analysts called dubious because those governments inherited much higher inflation rates.
"The dragon of inflation that terrorized the lives of Brazilians through the 1990's is definitely a thing of the past," she said on her official Facebook page, which is managed by her Workers' Party.
Analysts said the inflation woes raise the risk that Rousseff's administration will continue to take one-off measures to curb price increase at the expense of public finances.
"This is bad news," said Tatiana Pinheiro, an economist with Santander Brasil.
"Services prices keep rising nearly 9 percent a year, over 60 percent of all goods and services had price increases, and the headline inflation rate ended the year well above the 4.5 percent midpoint of the target range."
The government was hoping that a string of six straight interest rate increases and lower taxes on consumer goods such as cars and home appliances would keep inflation from piercing the 5.84 percent rate recorded in 2012.
While those policies prevented inflation from overshooting the government's target ceiling of 6.5 percent, the IPCA ended 2013 above the 4.5 percent center of the target range for the fourth year in a row. The government stressed that the outlook for 2014 is better and that the days of runaway prices in Brazil will not return.
"The important thing is that inflation remains within the target range. Inflation is under control and there are no expectations at all that it will get out of control in the future," Deputy Finance Minister Dyogo de Oliveira told reporters in Brasilia.
Economists see a less reassuring outlook. Inflation is expected to climb further to 5.97 percent in 2014 and could remain above the center of the target range until at least the end of 2017, according to a weekly central bank poll of about 100 economists.
Consumer price gains have failed to slow even as Brazil's economy contracted in the third quarter for the first time in four years. On a monthly basis, the IPCA index rose 0.92 percent in December, above the 0.82 percent median forecast of 28 economists.
A steep increase in air fares and fuel prices led inflation higher last month, driving transportation costs 1.85 percent up from November.
In a short statement, central bank president Alexandre Tombini said inflation was more resilient than expected in 2013 due to a depreciating currency, a tight labor market and rising transportation costs.
CENTRAL BANK AT CROSSROADS
Yields on interest rate futures rose as traders increased bets that the central bank would raise interest rates by 50 basis points in a policy meeting next week.
Brazil's benchmark interest rate stands currently at 10 percent, the highest among the world's major economies, and is expected to climb to 10.5 percent by end-2014 - a far cry from the record low 7.25 percent rate seen until last April.
However, many economists still think that the central bank will slow the pace of rate hikes to see how the economy reacts to the monetary tightening implemented in 2013. Most of Rousseff's popularity stems from record-low unemployment rates, a legacy of the fast economic growth seen during Luiz Inacio Lula da Silva's administration in the last decade.
"This is an election year. Part of the job will likely be left for later," said Fernando Parmagnani, an economist with Rosenberg & Associados, in Sao Paulo.
"The central bank is in a much more delicate position now." Fearing a sharper economic slowdown, Rousseff's government might be tempted to take ad hoc measures to prevent inflation from surging past 6 percent, wrote Gustavo Rangel, Latin America economist with ING.
One of the measures taken in 2013 was delaying gasoline price hikes by state-run oil major Petrobras, which helped keep a lid on inflation forcing the company to sell fuel at a loss.
The tax breaks offered to key industries also hurt public finances, which, coupled with a steady increase in government spending, has fueled market concerns of a possible credit downgrade by ratings agencies this year. Government-regulated prices rose just 1.52 percent in 2013, while freely determined prices jumped 7.30 percent.
yahoo.com
The IPCA consumer price index rose 5.91 percent in 2013, up from 5.77 percent in the 12 months through November, statistics agency IBGE said on Friday.
That was also well above market expectations for an increase of 5.82 percent, according to the median forecast of 22 economists in a Reuters poll. Stubbornly high inflation poses a major challenge for Rousseff, who plans to run for re-election in October.
If the central bank raises rates too much, it could send the economy into a recession; if not, price increases could dampen consumer confidence and even rekindle street protests as seen last year.
Seeking to put a positive spin on the numbers, Rousseff touted the "historic" fact that inflation has averaged less in her first three years in office than in the equivalent period under her two predecessors - a comparison some analysts called dubious because those governments inherited much higher inflation rates.
"The dragon of inflation that terrorized the lives of Brazilians through the 1990's is definitely a thing of the past," she said on her official Facebook page, which is managed by her Workers' Party.
Analysts said the inflation woes raise the risk that Rousseff's administration will continue to take one-off measures to curb price increase at the expense of public finances.
"This is bad news," said Tatiana Pinheiro, an economist with Santander Brasil.
"Services prices keep rising nearly 9 percent a year, over 60 percent of all goods and services had price increases, and the headline inflation rate ended the year well above the 4.5 percent midpoint of the target range."
The government was hoping that a string of six straight interest rate increases and lower taxes on consumer goods such as cars and home appliances would keep inflation from piercing the 5.84 percent rate recorded in 2012.
While those policies prevented inflation from overshooting the government's target ceiling of 6.5 percent, the IPCA ended 2013 above the 4.5 percent center of the target range for the fourth year in a row. The government stressed that the outlook for 2014 is better and that the days of runaway prices in Brazil will not return.
"The important thing is that inflation remains within the target range. Inflation is under control and there are no expectations at all that it will get out of control in the future," Deputy Finance Minister Dyogo de Oliveira told reporters in Brasilia.
Economists see a less reassuring outlook. Inflation is expected to climb further to 5.97 percent in 2014 and could remain above the center of the target range until at least the end of 2017, according to a weekly central bank poll of about 100 economists.
Consumer price gains have failed to slow even as Brazil's economy contracted in the third quarter for the first time in four years. On a monthly basis, the IPCA index rose 0.92 percent in December, above the 0.82 percent median forecast of 28 economists.
A steep increase in air fares and fuel prices led inflation higher last month, driving transportation costs 1.85 percent up from November.
In a short statement, central bank president Alexandre Tombini said inflation was more resilient than expected in 2013 due to a depreciating currency, a tight labor market and rising transportation costs.
CENTRAL BANK AT CROSSROADS
Yields on interest rate futures rose as traders increased bets that the central bank would raise interest rates by 50 basis points in a policy meeting next week.
Brazil's benchmark interest rate stands currently at 10 percent, the highest among the world's major economies, and is expected to climb to 10.5 percent by end-2014 - a far cry from the record low 7.25 percent rate seen until last April.
However, many economists still think that the central bank will slow the pace of rate hikes to see how the economy reacts to the monetary tightening implemented in 2013. Most of Rousseff's popularity stems from record-low unemployment rates, a legacy of the fast economic growth seen during Luiz Inacio Lula da Silva's administration in the last decade.
"This is an election year. Part of the job will likely be left for later," said Fernando Parmagnani, an economist with Rosenberg & Associados, in Sao Paulo.
"The central bank is in a much more delicate position now." Fearing a sharper economic slowdown, Rousseff's government might be tempted to take ad hoc measures to prevent inflation from surging past 6 percent, wrote Gustavo Rangel, Latin America economist with ING.
One of the measures taken in 2013 was delaying gasoline price hikes by state-run oil major Petrobras, which helped keep a lid on inflation forcing the company to sell fuel at a loss.
The tax breaks offered to key industries also hurt public finances, which, coupled with a steady increase in government spending, has fueled market concerns of a possible credit downgrade by ratings agencies this year. Government-regulated prices rose just 1.52 percent in 2013, while freely determined prices jumped 7.30 percent.
yahoo.com
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