WRAPUP 1-Brazil inflation remains within target band in mid-March

Fri Mar 22, 2013 10:55am EDT

* IPCA-15 index up 6.43 percent in 12 months to mid-March
    * Traders pare bets on April interest  rate increase
    * Current account deficit suggests strong consumer demand

    By Silvio Cascione
    SAO PAULO, March 22 (Reuters) - Brazil's inflation rose
slightly less than expected in the month to mid-March,
reinforcing bets that the central bank could wait until at least
May to start raising interest rates.
    Brazil's benchmark IPCA-15 price index rose
0.49 percent, slowing from a 0.68 percent advance in the month
to mid-February, statistics agency IBGE said on Friday. The
median forecast for the inflation rise to mid-March was 0.53
percent.
    Yields on interest rate futures dropped in trading
in Sao Paulo, suggesting a smaller perceived likelihood that the
central bank would raise the benchmark Selic interest rate at
its next monetary policy meeting on April 17. The yield on the
contracts maturing January 2014, the most traded in the
session, fell to 7.77 percent, from 7.84 percent on Thursday. 
    In the 12 months to mid-March, inflation accelerated to 6.43
percent, from 6.18 percent one month before. But it still
remained below the annual inflation target ceiling of the
central bank, which is 6.5 percent.
    "This should provide some relief in the short term. Those
betting on a rate increase only in May could feel more
comfortable," said Jankiel Santos, chief economist at Espirito
Santo Investment Bank in Sao Paulo.
    "The number continues to be worrisome. But we finally had a
positive surprise about inflation, while all the latest releases
brought us negative surprises," he added.
     In the month to mid-March price rises continued to be
widespread, with almost three-quarters of consumer items in the
IPCA index showing gains in the month to mid-March, several
economists said. That was the highest proportion in monthly
price gains in more than a decade, as gauged by a "diffusion
index."
    In another sign of robust demand by Brazilian consumers,
Brazil's current account deficit widened in February from a year
ago as imports outpaced exports for the second straight month,
central bank data showed on Friday.
    Rising inflation has put Brazil's central bank in a corner.
After slashing its benchmark Selic rate 10 straight times
through October to 7.25 percent to revive sluggish growth,
policymakers acknowledged they could start raising it again in
coming months even as the economic recovery remains fragile.
    President Dilma Rousseff's government has cut electrical
energy rates and said on March 8 it would scrap federal taxes on
food staples and toiletries in an attempt to put a lid on
inflation..
     The newspaper daily newspaper O Estado de S.Paulo reported
on Friday the president plans to give tax breaks to the diesel,
oil and health insurance companies.
     Under the plan, Rousseff hopes to avoid hikes in public
transportation prices scheduled for the second half of the year,
the paper said, without citing sources. A spokesperson at
Brazil's finance ministry was not immediately available to
comment on the report.
    
    However, the mid-March IPCA-15 numbers suggested such tax
cuts could only have a limited effect, at best. Food prices rose
1.40 percent, from 1.74 percent in February, as many
supermarkets have not fully passed on the lifting of taxes on
food staples to consumers.
    "Tax cuts here and there have failed to arrest the
widespread trend of rising prices, and the underlying problem of
high service inflation remains unsolved," wrote Nomura
strategists Tony Volpon and George Lei in a research note.
     "Hiking the Selic (interest rate) policy rate is still
needed to anchor inflation expectations, and in our opinion, it
is better early than late," they added.
     The central bank will probably start increasing its
benchmark Selic rate in May, lifting it by 100 basis points to
8.25 percent this year and to 8.50 percent in 2014, according to
a weekly central bank poll published on Monday. 
    Brazil's sticky inflation contrasts with several other Latin
American countries which have inflation targets. Tame price
rises allowed Mexico's central bank to cut interest rates
earlier this month for the first time in nearly four years.
    Estimates for the mid-March IPCA-15 index ranged from 0.40
percent to 0.63 percent. 

    Below is the result for each price category:    
    
                             February     March
                                               
 - Food and beverages            1.74      1.40
 - Housing                      -2.17     -0.70
 - Household articles            0.82      0.40
 - Apparel                       0.01      0.48
 - Transport                     0.46      0.32
 - Health and personal care      0.78      0.42
 - Personal expenses             1.15      0.51
 - Education                     5.49      0.50
 - Communication                 0.08      0.27
                                               
 - IPCA-15                       0.68      0.49
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