Inflation remains unstoppable in Brazil

Bazilian Inflation To June 2013 2013-07-01Enlarge GraphDespite continued interest rate hikes, inflation for early June inched higher once again

Inflation is one of those indicators that are important only when they’re out of bounds. Brazilian inflation is currently outside the target bounds set by the Brazilian Central Bank (BCB), which has led to steep increases despite less than stellar economic growth.

The IGP-10, which is an inflation indicator published by the FGV (the Fundação Getulio Vargas, a Brazilian higher education institution) posted an increase of 0.6 percentage points in June. The IGP-10 comprised monthly data collected up to the 10th of the month in which the report is published, so the indicator will include the full effect of the interest rates hike in April and part of the further hike recorded at the end of May.

The May reading of the IGP-10 had shown a decrease of 0.12 percentage points, but it gave back half of that decrease in the latest reading. This development is in line with the BCB’s concerns that the initial 25 basis point hike was not enough and that further action was required.

Economic growth forecasts further interest rate hikes

Additionally, Brazil’s recent IBC-Br index reading (the BCB’s GDP growth forecast index) surprised analysts in May, posting stronger than expected growth. This unanticipated strength increases the likelihood of more interest rate hikes, as the BCB can now be more confident that the economy remains at a strong base level growth.

Short-term and longer-term implications

In the short term, analysts expect more interest rate hikes both due to the stubborn inflation increase and the improved GDP growth expectations. This could hurt the Brazilian equities market in the short term, but in the medium to long terms, the lower inflation and sustained growth may start to reflect positively in the market.

Both the recent Manufacturing PMI and Services PMI predicted weaker near term performance. While other indicators are starting to show positive signs, there is still no solid indication of a change of gear in the market. Growth remains sluggish, and inflation remains an issue.