UPDATE 3-Brazil inflation breaches target, interest rates in focus

Wed Apr 10, 2013 2:43pm EDT

* Inflation rises 6.59 pct in 12 months through March
    * Yields on rate futures drop despite inflation worries
    * Central bank to decide on interest rates next week


    By Silvio Cascione and Asher Levine
    SAO PAULO, April 10 (Reuters) - Inflation in Brazil pierced
the government's target ceiling in March for the first time in
over a year but the rise was slightly less than expected,
fueling bets the country's central bank could wait until May to
start hiking interest rates.
    The benchmark IPCA consumer price index rose
6.59 percent in the 12 months through March, breaching the
official target ceiling of 6.5 percent for the first time since
November 2011, statistics agency IBGE said on Wednesday.
    Consumer prices rose 0.47 percent from February, slowing
from a gain of 0.60 percent in the previous month. The increase
was slightly below the median forecast for a rise of 0.50
percent in a Reuters poll. 
    Interest rate hikes are seen as almost inevitable in Brazil
where sharp price rises have begun to irk Brazilians and could
spoil President Dilma Rousseff's bid for re-election next year.
    "I think this will give some room to the central bank and it
will raise the Selic (benchmark interest rate) only in May. In
April we will see the Selic left unchanged but with a split
decision," said Newton Rosa, chief economist at SulAmerica
Investimentos in Sao Paulo, of Wednesday's inflation data.
    "Traders may see this as a sign that inflation will come in
line with the central bank's expectations, so that relieves some
of the urgency that the Selic will have to rise next week."
    Brazil's interest rate yield curve flattened as
traders perceived lower inflation risk in the long-term.
    The central bank responded to the data by forwarding remarks
by the bank's president, Alexandre Tombini, during a Senate
hearing on April 2. 
    "We'll see how inflation comes in March - core inflation,
the level of diffusion. We will evaluate a number of economic
indicators, and certainly inflation will be assessed, not to
determine our strategy, but the tactics in the coming period."
    Tombini's reference to core inflation measures, which slowed
on a monthly basis, is another sign the bank could leave the
Selic rate unchanged next week, said Neil Shearing, chief
emerging markets economist with Capital Economics in London. 
    "Most of the rise in inflation has been food and this is
largely outside of the control of the central bank."
    Finance Minister Guido Mantega later said that the latest
inflation print was "good news" and showed that prices are
easing and will continue to do this year even as the economy
picks up steam.  
    However, he warned that the government will "spare no
efforts" to control high inflation.
    
    Food prices rose less in March than they did in February but
 continued to be the main driver of inflation, with the cost of
onions surging 21 percent from the previous month. Personal
expenses such as hairdressing and salaries for maids and
domestic workers continued to rise sharply, IBGE said.
    The so-called diffusion index, which measures the proportion
of sectors with price increases, dropped to 69 percent from 72
percent in February. Despite the fall, it was the highest index
for March in a decade, according to economists.
    The recent spike in consumer prices has caught the central
bank by surprise. Six months ago, estimating that inflation
would be at just 5.2 percent now, policymakers slashed interest
rates for a tenth straight time to boost economic growth.
    The sharp rise in the value of everyday products like
tomatoes -- which rose 122 percent in a year --  has started to
worry Brazilians, many of whom remember the years of
hyperinflation of the 1980s and 1990s when prices could rise by
double digits in a day.  
    In an example of just how worried Brazilians are with
prices, the local agriculture ministry seized half a ton of
tomatoes being smuggled from neighboring Argentina and Paraguay.
Retailers at the border told online news site G1 that high
prices in Brazil are fueling the contraband of cheaper tomatoes.
     
    Rousseff and her top aides have begun to debate the
possibility of an eventual rate hike to control prices,
according to unsourced reports in local newspapers Valor
Economico and Folha de S. Paulo on Wednesday.
    The government has eliminated federal taxes on food staples,
slashed electricity rates and allowed the local currency to
appreciate slightly in a bid to slow inflation. Officials have
said the government could continue to slash taxes for several
sectors, which could ultimately ease pressure on prices.  
    Economists expect policymakers to raise interest rates to
8.50 percent this year from an all-time low of 7.25 percent
currently, according to the median forecast in a weekly central
bank poll. 
      
    Below is the result for each price category:    
                              February   March
 - Food and beverages              1.45       1.14
                                         
 - Housing                        -2.38       0.51
                                         
 - Household articles              0.53       0.11
                                         
 - Apparel                         0.55       0.15
                                         
 - Transport                       0.81      -0.09
                                         
 - Health and personal care        0.65       0.32
                                         
 - Personal expenses               0.57       0.54
                                         
 - Education                       5.40       0.56
                                         
 - Communication                   0.10       0.13
                                         
                                                  
 - IPCA                            0.60       0.47