SAO PAULO (Reuters) -Brazil’s consumer prices rose by more than expected in the month to mid-February, data from government statistics agency IBGE showed on Friday, with annual inflation remaining well above target after speculation that the goal could be boosted.
The country’s IPCA-15 consumer price index rose 0.76% in the month to mid-February, up from 0.55% in the previous month, while economists polled by Reuters had forecast a 0.72% increase.
Annual inflation reached 5.63%, down from 5.87% a month earlier but also above the 5.6% forecast by economists, with interest rate cuts still seen as unlikely in the very short term.
The latest data follows a clash between President Luiz Inacio Lula da Silva and central bank governor Roberto Campos Neto over high interest rates, when speculation of a potential government move to boost inflation targets emerged.
Lula’s criticism of the central bank led to a deterioration of inflation expectations and a steepening of the yield curve. Brazil has an inflation target of 3.25% this year and 3% in 2024 and 2025, in all cases with a 1.5-point tolerance band.
Campos Neto defended the central bank’s autonomy to pursue targets by hiking rates, currently at a six-year high of 13.75%, while Lula has said lending costs were far too high given the inflation trajectory, hindering economic growth.
Andres Abadia, Pantheon Macroeconomics’ chief Latin America economist, said that under “normal circumstances” the recent fall in annual inflation would trigger a dovish shift by the central bank, but that noise stemming from Lula’s remarks was still a threat.
“Unfortunately, uncertainties about the government’s commitment to low inflation, including the autonomy of the central bank, have raised red flags,” Abadia said in a note to clients.
Brazil’s top economic policy council earlier this month decided to put off the discussion by announcing no new resolutions regarding its inflation targets, but it may still review the targets at any time.
Some of the country’s top hedge fund managers have recently dubbed the inflation goals “unrealistic” and “too ambitious” to be met, calling for an upward change.
Under current targets, Friday’s inflation data will not ease policymakers’ concerns about the strength of core inflation, Capital Economics’ chief emerging markets economist William Jackson said.
Prices in eight of the nine groups surveyed rose in February, with education posting the largest impact. Only apparel costs fell in the period.
“We continue to think that Copom will only turn to monetary easing towards the end of the year, delivering 100bp of cuts (to 12.75%),” Jackson said – a view shared by private economists polled by the central bank.
(Reporting by Gabriel Araujo; Editing by Chizu Nomiyama and Louise Heavens)
