Inflation likely to make Brazil increase rates by half a point

Brazil’s central bank was expected to raise the country’s core interest rate by at least 0.5 percentage points last night as inflationary pressure has spread across the economy, adding to demands for pay rises especially among public sector workers.
A survey of market economists by Bloomberg, the financial news service, found that most expected a 0.5 point increase in the so-called Selic target overnight rate. If confirmed, it would be the third half-point increase since the bank began raising rates in April after three years of monetary loosening.
However, many economists expect a 0.75 point increase, detecting a more hawkish tone in recent comments by Henrique Meir-elles, president of the central bank, along with a broadening and quickening of inflationary pressures.
Mr Meirelles told the Financial Times recently that inflation was the greatest threat to the Brazilian and global economies and called on other central bankers to concentrate more attention on inflation than on the risk of recession. He has since spoken of the need to “act vigorously” to keep inflation in check.
Consumer price inflation was running at an annual rate of more than 6 per cent in the 12 months to June, above the government’s core target of 4.5 per cent. Most economists expect it to reach 6.5 per cent by the end of the year, the upper limit of the government’s target range.
More pressure on consumer inflation is expected to come from quickly rising prices in the wholesale sector and from imported goods.
Rising inflation expectations are also having an impact on wage negotiations. This week, the government stepped in to end a three-week strike by postal workers, conceding a number of demands that had been rejected by management, including a 30 per cent pay rise to compensate for the dangers faced by workers making street deliveries and a one-off bonus.
Workers at Petrobras, the government-owned oil company, went on strike last week for more pay and are expected to resume industrial action next month.
In his interview with the FT, Mr Meirelles said: “There is significant pressure for pay increases among public sector workers and evidently we are very concerned about that because these are permanent expenses.”
Recent comments by Mr Meirelles and other ministers have indicated a recognition that monetary policy alone cannot overcome inflationary pressures and that there is a need for tighter fiscal policy to curb overall demand by cutting government spending. But the government’s budget proposal sent to Congress this week proposes increases rather than reductions in public spending.