More rate hikes likely coming in Brazil as inflation overshoots forecasts

SAO PAULO (Reuters) – Brazil’s annual inflation rate slowed less than expected in early January, official data showed on Friday, cementing the likelihood that the central bank will hike interest rates by 100 basis points at its meeting next week.

Consumer prices as measured by the IPCA-15 index were up 4.5% in the year through mid-January, statistics agency IBGE said, slowing from 4.71% in the previous month but above the 4.36% expected by economists polled by Reuters.

Brazil’s central bank has been facing a challenging scenario marked by robust economic activity, a tight labor market and unanchored inflation expectations despite projections of a more aggressive rate path through this year.

Policymakers, vowing to pursue the central bank’s 3% inflation target, raised the benchmark interest rate by a full percentage point to 12.25% in December and signaled matching moves for the next two meetings.

“January’s IPCA-15 data won’t prompt the central bank to row back on the guidance provided at its last meeting,” Jason Tuvey, deputy chief emerging markets economist at Capital Economics, said in a note to clients.

“Inflation remains firmly above the central bank’s target, the economy continues to hold up well and fiscal concerns have by no means gone away,” he said.

Prices were up 0.11% in the month to mid-January, according to IBGE, a deceleration from the 0.34% rise reported in the previous month but above the 0.03% decrease expected by economists in the Reuters poll.

The monthly reading was driven by higher food and transportation prices, the agency said, although lower housing costs helped offset the pressure due to a major drop in electricity prices.

Elevated food prices have been a concern for Brazil’s government lately, with President Luiz Inacio Lula da Silva saying that finding ways to lower them should be a top priority.

“Inflation has rebounded significantly in recent months, with key leading indicators suggesting a poor near-term outlook,” said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics.

“This implies that the central bank will continue to raise rates aggressively, by 100 bp (basis points), at upcoming meetings.”