Brazilian inflation pierced above the 7 percent mark for the first time since 2005, dealing a sharp blow to hopes that the central bank could cut interest rates as the economy shows signs of slowing down. The jump exceeded even the most pessimistic expectations of analysts.
With 12-month inflation speeding yet farther from the government target range, analysts said it was unlikely Brazil's interest rates - the highest among major economies - would be able to cut rates at this month's meeting. Brazil's benchmark IPCA inflation index rose 0.27 percent in the month to mid-August, according to central bank data released on Friday. That outpaced not only the 0.1 percent rise to mid-July but even the highest forecast in a Reuters survey, at 0.24 percent.
In the 12 months to mid-August, the IPCA rose to 7.10 percent - well above the central bank target range of 4.5 percent, plus or minus 2 percentage points. "Despite the turbulence abroad, the central bank is unlikely to cut interest rates," said Luciano Rostagno, the chief strategist for CM Capital Markets. "Going forward we'll likely reap some benefits from a drop in commodity prices. Right now, though, the outlook still calls for caution from policy-makers."
Inflation has become a major headache for President Dilma Rousseff, who has made it a priority to weaken the surge in prices that has especially hit her power base among lower-income voters. Interest rate futures' yields on Friday briefly edged up. Short-term yields continued slightly higher as the morning wore on, but long-term contracts settled back to trade near flat or even down slightly as traders said markets worked through a stack of sell orders. To curb inflation, the central bank has raised interest rates five times so far this year to 12.50 percent from 10.75 percent in December 2010 - an increase in the Selic lending rate at every meeting under head Alexandre Tombini, who took office in January.