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Inflation Not Quite Tamed Despite Fifth Brazil Rate Hike

By Tom Murphy

SAO PAULO--The Brazilian Central Bank has made a dent in inflation with five straight interest rate hikes--but it has failed to completely tame the vexing phenomenon often pictured in the Brazilian media as a voracious dragon.

In a unanimous decision Wednesday night, the bank acted again to raise its Selic base interest rate, this time by a half percentage point to a towering 9.5%. The rate began 2013 at 7.25%.


In a brief statement, the bank signaled it was not giving up the battle. The central bank said its decision "will contribute to putting inflation into decline and to assuring that this tendency persists next year."

But the effort often feels like running in place. Even after nine months of fuel price controls; jawboning with unions and retailers; rollbacks in consumer tax breaks and a series of interest rate hikes to curb installment buying, Brazil's 12-month inflation rate as of September weighed in at 5.86%--down from the June peak of 6.7%, but still a shade higher than calendar 2012 inflation of 5.84%.

The 12-month rate may decline a bit more in the coming months and could even close out 2013 at the central bank-projected 5.7%, but economists warn that the effect may be temporary.

"We expect year-on-year inflation to decelerate, but driven primarily by a calendar-basis effect," said economists at Sao Paulo's BES investment fund in a research note. September monthly inflation was 0.35%. Monthly rates for October, November and December of 2012 were all above 0.60%, meaning that even modest increases in monthly inflation through the end of this year will still produce a decline in the 12-month trend.

But the calendar-basis effect will end early in 2014.

What then?

"If you take into account how controlled prices have been compressed or delayed, plus services, food, foreign exchange and other factors, I would say that inflation is really above 10%," said Paulo Faria-Tavares, managing partner of Sao Paulo's PTX consultants.

Brazil's government has been holding back on fuel price hikes, precisely because of inflation fears. But frozen fuel prices hurt the bottom line at state-run oil giant Petrobras. Energy Minister Edison Lobao earlier this week hinted to reporters that a price hike was coming before the end of the year.

As for food, even Brazil's ever optimistic Finance Minister Guido Mantega admitted Wednesday that the recent decline in 12-month inflation was due, in part, to "seasonal factors," especially Brazil's record grain and oilseeds crop.

Brazilian food prices typically moderate in the second half of the year as the harvest works its way through the economy, but then rise again in the first half of the new year.

Foreign exchange is another factor that could easily slip out of control. Part of the reason for the 6.7% mid-year inflation spike was a 20% depreciation of the Brazilian real against the U.S. dollar during the first half of the year, pressuring prices of imports ranging from wheat and oil to mobile phone components. In August, the central bank stepped in with a $60 billion schedule of foreign exchange swap and U.S. dollar credit auctions.

The plan helped roll back the depreciation to just 10%, but the auction schedule ends in December.

Write to Tom Murphy at This e-mail address is being protected from spambots. You need JavaScript enabled to view it

Source: The Wall Street Journal -

Last Updated on Monday, 17 March 2014 10:58


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