UPDATE 4-Brazil inflation spike fans bets of interest rate hike

Thu Feb 7, 2013 12:19pm EST

* IPCA index rises 0.86 percent in January
    * Monthly inflation highest since April 2005
    * Futures market bets on 100 bps hike this year
    * Twelve-month inflation edges up to 6.15 percent
    * Central bank says it is worried, uncomfortable


    By Silvio Cascione
    SAO PAULO, Feb 7 (Reuters) - Brazil's inflation accelerated
to the fastest rate in nearly eight years in January, raising
bets of an interest rate hike this year that could complicate
the government's drive to reignite a near-stagnant economy.
    The Brazilian currency, the real , also jumped
on the news, hitting a 9-month high against the dollar after
central bank president Alexandre Tombini said he was worried
about inflation. 
    A central bank source told Reuters that 12-month inflation
will remain slightly above 6 percent through the first half of
2013, dangerously near the 6.5 percent ceiling of the government
target, but that a more stable exchange rate will help inflation
ease "a lot" in the second half of the year. 
    The country's benchmark IPCA consumer price index
 rose 0.86 percent in January, the highest monthly
reading since April 2005, government data showed on Thursday.
    In the 12 months through January, inflation
rose to 6.15 percent, the highest reading in a year. The
government targets inflation at 4.5 percent, with a tolerance
margin of plus or minus 2 percentage points.
    Interest rate futures rose across the board in the
BM&FBovespa exchange, suggesting more bets that the central bank
would raise its benchmark interest rate by around 100 basis
points this year, according to traders. The rate has been cut to
an all-time low of 7.25 percent to stimulate economic growth.
    Low interest rates and a depreciated currency are key
elements of President Dilma Rousseff's plans to boost investment
and output in Brazil's manufacturing industries. Taming
inflation has also been a top priority for her, but January's
number shows she just can't have it all.    
    "The central bank will tolerate a stronger real in an effort
to limit imported inflation, but this will come at the expense
of a further deterioration in Brazil's external competitiveness,
which will weigh on economic growth," wrote Neil Shearing, chief
emerging markets economist at Capital Economics in London.
    In an interview posted on O Globo website, Tombini said he
is feeling uncomfortable.
    "Inflation worries us in the short term. It's very
resilient, but it's not out of control," Tombini told O Globo
financial journalist Miriam Leitao.  
    Asked whether it was time for the central bank to adjust its
monetary policy, Tombini said he is "paying attention to
inflation.".
    The Brazilian real strengthened about 1.1 percent to 1.965
reais to the dollar after the publication of Tombini's remarks.
A Reuters poll showed on Wednesday that analysts expected the
real to remain around 2 per dollar for the next 12 months.
 
    Food and cigarettes were the main inflation drivers in
January, though analysts noted accelerating price rises for
nearly three of every four product categories. Core measures
were also stronger than in the same month a year ago, suggesting
the recent inflation spike is not likely to fade quickly.
    "If inflation worsens in the next two or three months, that
can lead to a monetary tightening later," said Carlos Kawall,
chief economist at J.Safra in Sao Paulo.
    Brazil is alone in its struggle against inflation among the
largest market-friendly Latin American economies. Inflation has
subsided elsewhere in the region, such as in Mexico and Chile, 
as a spike in global food prices fades. 
    
 
    The central bank cut interest rates 10 straight times
through October 2012, saying Brazil no longer needed one of the
highest borrowing costs in the world to tame inflation. With low
interest rates as a top priority, the government has been trying
to use other tools to fight price rises, such as tax breaks.
    A government-sponsored reduction in electricity power rates
prevented January inflation from reaching 1 percent, said Juan
Jensen, an economist with Tendencias Consultoria in Sao Paulo.
    It should also limit the monthly price rise in February,
though annual inflation is expected to remain above 6 percent -
and possibly even breach the target ceiling - by at least
mid-year, economists said.
    The government is also mulling tax cuts on food staples,
Rousseff and Finance Minister Guido Mantega said recently. Such
measures will probably force the government to miss a key budget
target this year. 
    The January IPCA index had been expected to rise 0.84
percent, from an increase of 0.79 percent in December, according
to the median forecast of 31 economists surveyed by Reuters. 
    Forecasts for the rise ranged from 0.78 to 0.90 percent. 
    Personal expenses rose 1.55 percent from December; the
category includes cigarettes, whose prices spiked 10.11 percent.
Food prices rose 1.99 percent.
       
    Below is the result for each price category: 
                              January     December
                                          
 - Food and beverages               1.99        1.03
                                          
 - Housing                         -0.20        0.63
                                          
 - Household articles               1.15        0.27
                                          
 - Apparel                         -0.53        1.11
                                          
 - Transport                        0.75        0.75
                                          
 - Health and personal care         0.73        0.40
                                          
 - Personal expenses                1.55        1.60
                                          
 - Education                        0.35        0.19
                                          
 - Communication                   -0.08        0.03
                                          
                                                    
 - IPCA                             0.86        0.79
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