Brazil’s inflation index above 5% for first time in four years

Annual inflation index in Brazil rose above 5% in February for the first time in four years, official figures showed, above analysts’ expectations and almost certainly setting the seal on an interest rate hike next week.

The central bank (CB) was already expected to deliver the first increase in Brazilian interest rates since 2015 at its March 16-17 meeting. The latest consumer price index (CPI) open up the possibility that it may even be a 75 basis point increase.

“The jump in Brazilian inflation to a stronger-than-expected 5.2% last month makes it almost certain that Copom will begin a tightening cycle next week,” said William Jackson, chief emerging market economist at Capital Economics, referring to the bank’s rate-setting committee known as ‘Copom’.

“While we’ve penciled in a 50bp rate hike to 2.50%, these data make a larger rise of 75bp increasingly likely,” he said.

The annual rate of consumer inflation in February rose to 5.20% from 4.56% in January, statistics agency IBGE said, above the 5.06% median forecast in a Reuters poll of economists and the highest since January 2017.

The central bank’s year-end target is 3.75%, with a 1.5 percentage point margin of error on either side. Many economists expect inflation to continue rising in the coming months and peak above 6% before easing.

The monthly rate of inflation rose to 0.86% in February, IBGE said, the highest for any February since 2016 and higher than economists’ forecast for a 0.72% increase.

Eight of the nine categories surveyed by IBGE showed rising prices in February, with a 2.28% rise in transport costs accounting for almost half of the overall rise.

Within the transport segment, fuel prices rose more than 7% on the month, IBGE said.

The central bank’s benchmark Selic interest rate has been held at a record low 2.00% since August last year. The bank’s latest weekly survey of economists on Monday suggested it will be raised to 4.00% by the end of this year and 5.50% next year.

Meanwhile, Brazil’s lower house of Congress approved the basic text of a bill on Thursday that revives a federal cash transfer program to help millions of poor families whose incomes have been hit by the COVID-19 pandemic.

The measure will allow emergency stipends totaling up to 44 billion reais ($7.96 billion) to be paid to low-income Brazilians over the next four months, with recipients expected to get an average of 250 reais per month.

The chamber cast 366-127 votes for the constitutional amendment in a second of two rounds of voting, more than in the first-round when it was approved by 341 votes. Brazil’s Senate passed the amendment recently.

The aid package will not be subject to the government’s usual fiscal rules, but the bill includes counter measures delivering fiscal savings in the coming years to mitigate the impact on fragile public finances.

Economy Ministry and central bank officials, as well as investors, have warned that any increase in spending must be matched by savings elsewhere in the budget to show the government’s long-term commitment to reducing its record debt.

The government’s emergency aid to millions of poor families last year totaled some 322 billion reais, worth around 4.5% of GDP, and expired on Dec. 31. It ensured the economy’s 4.1% slump last year was nowhere near as bad as many had originally feared, but it also fueled a record budget deficit and public debt.

Brazil’s real on Thursday rallied 2% against the dollar, boosted by another round of central bank intervention in the swaps market and inflation data that analysts said sets the seal on an interest rate increase next week. February’s 5.2% annual inflation rate was higher than expected and well above the central bank’s year-end target of 3.75%, cementing expectations it will raise its benchmark Selic lending rate by 50 basis points next week and adding fuel to the real’s rally in recent days.

With global market sentiment also positive, the real jumped 2% to close at 5.54 per dollar. The currency is on course for its best week in more than three months.

The central bank’s $1 billion sale of foreign exchange swaps followed two separate interventions on Wednesday, one a $1 billion sale of FX swaps and the other a $405 million spot market sale.

After the market had closed, the central bank said it will sell up to $750 million of FX swaps on Friday.

Sergio Goldenstein, strategist at OHMResearch and a former central bank director, believes inflation and fiscal risks have forced the central bank into taking an active policy of pushing the dollar lower.

“The central bank has finally decided to ‘break’ those long of the dollar, pushing it lower,” he tweeted late on Wednesday. “This puts long speculative or hedge dollar positions at risk, and attempts to avert or mitigate a negative spiral.