10:46 am ET |May 5, 2014
Inflation surged again in Brazil during April, another worrying development for a central bank that’s seen as being keen to stay out of October’s presidential election.
Many economists believe the central bank would like to wrap up a cycle of interest rate hikes that has lasted more than a year – at least until after the elections are over. Raising rates during the election cycle could be seen as damaging to President Dilma Rousseff, who is seeking re-election for a second term. Further hikes could choke off still weak economic growth.
The central bank has already raised its key interest rate nine times over the last year, and the Selic now stands at 11%, up from 7.25% in early 2013. The bank has hinted that it’s preparing to pause, perhaps as early as its next meeting on May 27 and 28.
And yet inflation is piling up, largely a result of a shock in food prices earlier this year. While those are expected to have receded slightly in April, and month-on-month inflation may be slightly lower than in March, the cumulative effect is troublesome. The inflation data will be published on Friday.
A survey by The Wall Street Journal of 14 economists showed 12-month inflation likely rose to 6.42% for the 12 months ended April, up from 6.15% at the end of March. For the month of April, inflation is expected to have dipped to 0.81%, versus a rise of 0.92% in March, as those food prices have eased.
Still, the 12-month level would be the highest since June 2013, when inflation reached 6.7%, and is worryingly close to the upper limit set by the government. The central bank’s target is for inflation of 4.5%, with a tolerance band of minus or plus two percentage points.
Finance Minister Guido Mantega recently said the spike in prices was expected and shouldn’t last long. “We had less rain, which caused some food products to go up. But they are already going down,” Mr. Mantega said. “In May and June [inflation] will be lower.”
However, economists sees more pressure in the pipeline. That may force the central bank’s hand.
“The problem with inflation in Brazil is deeper. Inflation in general in Brazil is too high because of the pressure on services costs due to higher salaries and low unemployment in recent years,” said Roberto Padovani, an economist at Banco Votorantim. “This kind of pressure is more difficult to combat.”