Brazil Inflation Shock Fuels Bets on Mammoth 200-Point Rate Hike

Brazil’s inflation sped up more than expected in October, spurring bets that the central bank will hike interest rates by as much as 2 percentage points in response to government plans for greater spending.

Pedestrians wearing protective mask cross Paulista Avenue in Sao Paulo, Brazil.
By Andrew Rosati
November 10, 2021 | 04:20 PM

Bloomberg — Brazil’s inflation sped up more than expected in October, spurring bets that the central bank will hike interest rates by as much as 2 percentage points in response to government plans for greater spending.

Annual inflation accelerated to 10.67%, above all estimates in a Bloomberg survey. Consumer prices rose 1.25% from the month prior, the national statistics institute reported on Wednesday. It was the biggest rise for the month of October in nearly two decades.

Brazil inflation sped past analysts' expectations in Octoberdfd

Policy makers have raised the interest rate by 575 basis points since March amid surging cost of living increases. Complicating the price outlook further, congress is debating legislation that would allow President Jair Bolsonaro to boost cash transfers to the poor ahead of next year’s election. Investors fear those efforts to bypass a constitutionally-mandated spending ceiling will clear the way for even more expenditures.

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What Bloomberg Economics Says

“A significant upside surprise to Brazilian inflation in October and will likely fuel speculations about a possible acceleration in rate hikes at the central bank’s next monetary policy meeting.”

--Adriana Dupita, Latin America economist

Swap rates on the contract due in January 2023, which indicate investor expectations for the Selic at end-2022, rose 2 basis points around midday in Sao Paulo.

“Inflation continues to accelerate, leading to a worrying unanchoring of expectations for 2022,” said Carla Argenta, chief economist at CM Capital Markets, a brokerage in Sao Paulo.

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Price Drivers

All nine baskets of goods and services surveyed by the statistics agency increased in price last month. The most significant drivers were transport costs, which rose 2.62% on the month, and food and beverage costs, which increased 1.17%.

The annual inflation rate is nearing a previous peak of 10.71% reached in 2016 during the government of Dilma Rousseff, who was impeached amid national outrage over economic malaise. The central bank targets annual inflation at 3.75% this year and 3.5% in 2022.

“Against a backdrop of intense inflationary pressures and worsening balance of risks, the likelihood that the central bank will be able to drive inflation to the 3.5% target in 2022 is very low,” Goldman Sachs Group Inc. economist Alberto Ramos wrote in a research note.

In the minutes to its last policy meeting, the central bank said it had considered a rate hike bigger than the 150 basis points it delivered in October. The bank pledged another increase of the same magnitude in December, but interest rate futures now show bets on a rise of nearly 200 basis points. That would be the most aggressive monetary tightening since the end of 2002.

After the inflation data, Goldman sees a 20% probability of a hike greater than 150 basis points when policy makers meet next month, while CM Capital Market is calling for an increase of 200 basis points.

While inflation is accelerating globally, it has been a bigger problem in Latin America, with prices rising faster than expected in Mexico, Chile, and Peru last month.