Bloomberg — Brazil’s inflation shot past expectations last month just as Russia’s invasion of Ukraine sends global commodity prices soaring and prompts speculation the central bank will raise its interest rate more than expected.
Prices increased 10.54% in February from a year ago, above the 10.47% median forecast in a Bloomberg survey. Monthly inflation stood at 1.01%, the national statistics agency reported on Friday, above the 0.95% analyst estimate.
Policy makers are extending one of the world’s most aggressive tightening cycles in the wake of the pandemic, which has already added 8.75 percentage points to borrowing costs in a year. Inflation sped above the 2022 target of 3.5% despite sluggish demand. Now, the war in Ukraine is fueling a rally in raw material costs -- and lifting consumer price pressures along with them.
What Bloomberg Economics Says: The February “print showed that, despite massive rate hikes over the last 12 months, Brazilian inflation remains high, rising, and resilient. It was already a tall order for the central bank to bring inflation within the targeted band this year, but the war in Ukraine has compounded that challenge, adding significant upside risks to price gains.” --Adriana Dupita, Latin America economist
All nine groups of goods and services monitored by the statistics agency became more expensive last month. As the Brazilian school year kicked off, educational goods jumped 5.61% while food and beverages rose 1.28%, representing the biggest monthly drivers.
Interest-rate swaps due in January 2023, which serve as an indicator of investor sentiment about monetary policy, rose 6.5 basis points in Friday morning trading, as traders weighed chances of even higher rates at the end of the tightening cycle. The real strengthened 0.5% to 4.9956 per dollar.
Inflation ‘Pipeline’
Already the central bank’s efforts had been complicated by global supply chain bottlenecks, as well as extreme weather conditions that have hurt farmers. In a sign of new inflation drivers, state-oil giant Petrobras said on Thursday it will increase the cost of fuels from diesel to gas.
While analysts eventually see consumer prices easing as the economy cools down and monetary conditions become tighter, they warn inflation is likely to stay stubbornly high for the foreseeable future.
“We do not yet see global food and energy inflation easing anytime soon, which means further cost pressures are in the pipeline for Brazil’s inflation,” Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, wrote in a note.
The central bank signaled it will deliver a smaller hike to the Selic, now at 10.75%, during its next decision March 16. Still, traders are betting borrowing costs will eventually have to rise above 13% to tame cost-of-living increases.
Economists see the combination of high rates and inflation dragging significantly on growth this year. Analysts surveyed by the central bank expect gross domestic product to expand just 0.4% in 2022.
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