SAO PAULO: Brazil’s Government probably missed its inflation target for 2011, posing an embarrassment for President Dilma Rousseff, but little concern forinvestors who believe the problem is under control and interest rates will keep falling this year.
Data to be released by the government is expected to show consumer prices rose 6.56 per cent last year, according to the median forecast of analysts in a Reuters poll.
The bank’s official inflation target was 4.5 per cent, with a “tolerance band” of 2 per centage points in either direction. If the result is confirmed, it would be the first time Brazil has missed its inflation target range since 2003.
At this point, the consequences are more likely to be political than financial. Investors have already digested the fallout from Brazil’s disappointing 2011, which also saw Latin America’s biggest economy grow only about 3 per cent, well below the pace that made it a star in recent years.
Inflation peaked on a 12-month basis at 7.31 per cent in September and is expected to keep falling. The focus now has shifted to how much further the central bank will cut interest rates in 2012 to stave off contagion from the euro-zone debt crisis and provide a jolt to suddenly conservative consumers at home.
“It’s not a good thing if they miss the target, but the truth is that Brazil has bigger challenges now,” said Gray Newman, chief Latin America economist for Morgan Stanley.
Rousseff may not get off the hook so easily with the Brazilian public, which is especially sensitive about prices because of memories of hyperinflation in the 1990s. Newspapers are almost certain to criticize the center-left leader for missing the target during her first year in office, despite her vows not to “mess around” with inflation.
If the target range is breached, central bank chief Alexandre Tombini is required by law to send a letter to the finance ministry explaining why the target was missed and what steps are being taken to remedy the situation.
Other big emerging markets such as India and China also struggled with inflation last year, as volatile commodities prices and robust domestic demand drove prices higher.
In Brazil, the situation was exacerbated by a surge in consumer credit in 2010, when the economy grew at its fastest pace in more than two decades. Rousseff was able to ride that wave to election as the incumbent party candidate, but she then had to spend much of her first year in office cleaning up after the excesses of the boom, high inflation among them.
The central bank raised rates during the first half of 2011, but then reversed course and began easing when it became clear that the danger posed by the euro-zone crisis was more important than missing the price target by a few basis points.
In fact, both Tombini and Rousseff are riding high at the moment. Tombini’s decision to begin cutting rates on August 31, which earned him heavy criticism at the time, is now widely viewed as prescient. Several other central banks soon followed Brazil’s lead in cutting rates.
Inflation is expected to close 2012 well within the target range at around 5.32 per cent, according to the latest central bank survey of economists.
Rousseff’s popularity has also remained near all-time highs above 70 per cent. Residual good will from Brazil’s boom years and her tough stance on corruption have helped defy predictions that rising inflation and slowing economic growth would take a toll on Rousseff’s image.