(Bloomberg) — Brazil’s central bank reinforced its pledges of two more full percentage point hikes, amid a more adverse scenario where annual inflation remained stubbornly above target.
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Policymakers see annual inflation hovering above the bank’s tolerance range until the third quarter of the year, after which it should slow down even if it remains higher than its 3% goal, Governor Gabriel Galipolo wrote in a letter published Friday. The economic scenario is proving less uncertain and more adverse, reinforcing the need to lift borrowing costs to 14.25% by March.
Strong growth, a weaker real and severe weather drove consumer price increases which rose 4.83% in December from a year earlier, according to official data released earlier Friday. The reading was roughly in line with the 4.84% median estimate of analysts surveyed by Bloomberg, but still above the bank’s 4.5% tolerance range ceiling, which prompted policymakers to write a public letter as stipulated by law.
“The total magnitude of the tightening cycle will be determined by the firm commitment of reaching the inflation target,” Galipolo wrote. The benchmark Selic rate is currently at 12.25%, with most traders betting it will reach 16% by mid-year.
This was Galipolo’s first public letter after taking office earlier this month. The last time inflation breached the ceiling was in 2022, but consumer-price growth began to cool shortly thereafter. Following the government’s plans to update Brazil’s inflation regime, the bank will now monitor consumer price increases in a moving horizon instead of the calendar year.
Now, a hot economy and investor anxiety over public finances are stoking price pressures, wearing on consumers and grinding on President Luiz Inacio Lula da Silva’s popularity. Many analysts are pessimistic about the months to come.
“This is a relatively positive end to the year, but it offers little comfort as the inflation outlook has deteriorated significantly,” Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, wrote in a note.
Swap rates on the contract due in January 2026, an indicator of the financial market outlook toward monetary policy at the end of this year, rose nearly 6 basis points in morning trading immediately after the inflation report.
Core Inflation
Digging into Friday’s data, some economists were quick to point out that gauges of underlying inflation remained stubbornly high. That’s likely to maintain pressure on policymakers in upcoming rate decisions.
“Even though the headline numbers were in line with estimates, the details show worsening core and services inflation,” said Milena Landgraf, a partner at Jubarte Capital, in Sao Paulo.
A 0.56% monthly fall in housing prices, thanks to cheaper electricity bills, drove December’s inflation slowdown. Yet every other group of goods and services tracked by the statistics agency became more expensive in the period, with food and transportation costs showing the biggest gains. On a monthly basis, overall prices increased 0.52%.
What Bloomberg Economics Says
The inflation “breakdown continued to show signs of widespread price pressures, posing a challenge for new central bank chief Gabriel Galipolo and his revamped board. Galipolo has said the bar is high to depart from forward guidance of a 100-basis-point rate hike at the Jan. 29 meeting. Despite worrying signs from underlying inflation, the latest CPI report doesn’t meet the mark.”
— Adriana Dupita, Brazil and Argentina economist
— Click here to read the full report
Galipolo projected a hawkish stance ahead of his term, vowing to do “whatever it takes” to tame inflation. Imported price pressures and inertial factors were the main drivers for last year’s deviation from the goal, he wrote. Future estimates of consumer price increases above 3% and a stronger economy were also to blame, he added.
Policymakers’ efforts to contain price increases are being complicated by dismay over the government’s plans to address its budget gap. While Lula has tried to assuage those fears, a package of spending cuts unveiled in November fell well short of investors’ expectations.
The resulting selloff made Brazil’s currency — the real — tumble to an all-time low against the dollar in December, driving up the costs of imports. There was a “significant” exchange depreciation mainly driven by domestic factors, governor Galipolo wrote on Friday.
–With assistance from Giovanna Serafim, Josue Leonel and Raphael Almeida Dos Santos.
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