Halister News

(Bloomberg) -- Above-all-estimates Jan. CPI shows Brazil is facing sticker shock that may push BCB to keep interest rates high to slow inflation, Eduardo Velho, chief economist at INVX Global Partners says in a phone interview.

• Budget crises across country has led governors to raise transport fares and taxes, adding to pressure seen in food prices due to weather conditions
  • “There’s no room for the government to maintain subsidies”, Says Velho, the analyst whose estimate got closest to Jan. CPI of 1.27% vs prior 0.96% among economists surveyed by Bloomberg
  • Higher costs leading companies to increase prices even amid deep recession; “Brazil’s economy is becoming similar to the ’80s crisis pattern,” with stagnated activity combined with high inflation
  • Many companies are closing doors given the prolonged recession; that curbs the local competition, reducing the supplies of goods and services and preventing lower prices despite the weak activity
  • “It’s a stagflation pattern,” Velho said
• Velho forecasts CPI of 7.5% and Selic rate of 13.75%; sees increasing risk of inflation above the estimate, which could make it difficult for BCB to lower its rate
• Reforms such as those on pension regime, law that links minimum wage lifts to CPI plus GDP moves could be way to restore confidence in the economy
  • “A pension regime reform could boost the confidence the same way we saw in 2003 when Lula government raised the primary surplus target”