Brazil Inflation December 2007

Brazil's consumer prices rose at the fastest inter-monthly rate in over two years last month, making it harder for the central bank to further cut Latin America's highest benchmark lending rate. Consumer prices, as measured by the IPCA index, jumped 0.74 percent in December, the biggest increase since October 2005, the national statistics agency said. The gain, fueled by food prices, was almost twice the 0.38 percent increase in November and pushed the annual rate to 4.46 percent.



Higher food prices accounted for most of the inflation increase, climbing 2.1 percent in December, the biggest gain since January 2003. Food prices climbed 10.8 percent last year and were responsible for almost half the increase in the annual rate, which accelerated for the first time in five years.

The central bank ended a two year cycle of interest rate cuts on Oct. 17 2007, after inflation began to accelerate. With both economic growth and annual inflation picking up speed, the central bank is unlikely to make further reductions to the overnight rate, which is already at a record low of 11.25 percent, and may be forced to raise rates at some point this year.

Brazil's central bank targets annual inflation of 4.5 percent. A plus or minus 2 percentage point range can be used to accommodate unexpected price shocks. ABN Amro expects inflation to quicken to 4.8 percent this year, up from an earlier forecast of 4.3 percent.

The real gained 0.5 percent to 1.7501 per dollar at 12:15 p.m. New York time yesterday, following a gain of 20 percent last year.

Inflation and Interest Rates

Brazil's real rose again yesterday after Federal Reserve Chairman Ben Bernanke signaled the U.S. central bank may cut interest rates further this month to shore up growth in the world's largest economy. The real rose 0.6 percent to 1.7570 per dollar at 2:26 p.m. New York time after weakening as much as 0.2 percent earlier.

The outlook for lower interest rates in the U.S. makes Brazilian domestic fixed-income assets more attractive. Brazil's real interest rate, or the difference between the central bank's 11.25 percent benchmark lending rate and the country's 4.19 percent annual inflation, is 7.06 percent, the highest in any emerging market. In the U.S., the benchmark borrowing cost is 4.25 percent and on its way down, since Bernanke's comments have greatly increased speculation the policy- setting Federal Open Market Committee will cut the federal funds target by a half-percentage point on Jan. 30.

``Additional policy easing may well be necessary'' to offset ``downside risks'' to U.S. growth, Bernanke said in his first speech on the economy since the Fed's Dec. 11 meeting. Lower interest rates may be required ``in light of the recent changes in the outlook for and the risks to growth,''

Yields on Brazil's zero-coupon bonds rose on speculation Brazil's IPCA consumer price index will probably show inflation accelerated more than economists forecast.

The Real Slips a Little

Brazil's real fell yesterday on concern that the latest U.S. jobs report signals the U.S. economy may slip into a recession, reducing demand for Brazilian exports and local financial assets. The real fell 0.2 percent to 1.7547 per dollar at 1:30 p.m. in New York after rising 1.1 percent earlier. The currency gained 20 percent against the dollar in 2007, which was the the biggest advance among the 16 most-actively traded currencies.

The vlaue of the real has been rising on the back of record sales abroad and growing interest in Brazil's high-yielding bonds following the sub-prime bust.

Brazil's benchmark stock index, the Bovespa Index, fell as much as 3.7 percent at one point.

The yield on Brazil's zero-coupon bonds due in January 2009 rose 10 basis points, or 0.1 percentage point, to 12.08 percent, according to Banco Votorantim SA.


Despite the slowdown in global growth that we'll see this year, Brazil may well be one of the emerging economies whioch is able to decouple to some extent from the path of the G7 economies. At least that is the idea which will be put to the test in 2008.

The outlook for the maintenance of Brazil's 11.25 percent benchmark lending rate to fend off inflationary pressures also favors the real while the U.S. overnight lending rate may fall below 4 percent in the not to distant future.

Brazil's central bank bought U.S. dollars in the spot market yesterday as part of a strategy to slow the currency's appreciation. The bank bought dollars at 1.7590 reais apiece at auction. The bank has bought dollars on an almost basis daily since Oct. 8.

Merry Xmas and A Happy New Year

Well, a Merry Xmas and a Happy New Year to all my readers. Thank you for taking the time and trouble to pass-by. This blog will now - failing major and surprising new developments in the global economy - be offline till the end of the first week in January, or till after the festival of Los Reyes Magos in Spain (for those of you who know what this is all about). Come to think of it, maybe this is just what our ever hopeful central bankers are in need of even as I write - some surprise presents from the three wise men - but I fear that this year if these worthy gentlemen do somehow show at the next G7 meet, the star in the east which draws them will not be the one described in the traditional texts, but in all likelihood the rising star of India.



Credit crunch, did someone use the expression credit crunch?

Brazil Inflation December 2007

Brazilian consumer prices rose in the month through mid-December at their fastest pace in two years, damping expectations that the central bank will resume interest rate reductions any time soon. Consumer prices, as measured by the government's benchmark IPCA-15 index, rose 0.7 percent in the month through mid- December, triple the 0.23 percent in the previous month, the national statistic agency said today on its Web site.

Surging domestic demand on the back of the Brazilian economy's fastest growth since 2004 has pushed up the annual inflation rate from an eight-year low of 2.96 percent to just below the central bank's annual target of 4.5 percent this year.

Brazil's central bank kept its benchmark overnight interest rate unchanged at a record low 11.25 percent at each of the last two meetings on concern rising consumer demand may threaten its inflation target for 2008. In two years through September, policy makers cut rates at 18 straight meetings

Today's inflation report cements expectations that the central bank may not begin cutting rates again until year-end 2008, compared to just a few months ago when many economists said policy makers could resume cuts by March.

The surge in monthly inflation was led by food, fuel and cigarette prices. The IPCA-15 is a mid-month preview of the central bank's benchmark IPCA inflation rate, scheduled for release on Jan. 11.

The price of beans surged 104 percent in the 12 months through Dec. 10, while milk and potato prices climbed 20.5 percent and 70.4 percent respectively.

Latin America's biggest economy expanded 5.7 percent in third quarter, compared with a revised 5.6 percent increase in the second quarter, the government said Dec. 12.

In the four quarters ended Sept. 30, the economy grew 5.2 percent from 4.9 percent in the same period ended in June, the biggest accumulated annual growth rate since the end of 2004.



In a separate report from the national statistics agency, unemployment in the six largest Brazilian cities fell to 8.2 percent, the lowest since the government began a new series for the indicator in 2001.

Average household inflation-adjusted wages, a gauge of disposable income, jumped 2.4 percent from the same month a year earlier.

About 717,000 new jobs were created in November from the year-ago month, spurred by a jump in real estate-related occupations and social work including education and health care assistance, the government said.

Two in every three workers have remained in the same job for at least two years, indicating that the economy's expansion is also helping to stabilize to the nation's workforce.

Yields on interest-rate future contracts rose. The yield on the contract maturing in January 2009, the most widely traded in Sao Paulo's Commodities and Futures Exchange, rose 9.7 basis points, or 0.097 percentage point, to 11.98 percent at 10:45 a.m. New York time.