An unexpected rise in inflation during recent weeks threatens to over shadow Brazil's economic recovery and has prompted calls for a new social contract to ensure price and wage stability.
Consumer prices in Rio de Janeiro rose by 1.2 per cent in August, more than double the rate in July. Consensus forecasts of inflation have risen to 7.3 per cent for this year and 5.6 per cent for next year, above the central bank's targets of 5.5 and 4.5 per cent, respectively.
The deterioration of inflation forecasts “increases the probability of an interest rate increase this year”, CSFB, the investment bank, said in a report on Wednesday.
Indeed, Alexandre Schwartsman, central bank director for international affairs, said this week the bank had yet to “disinflate” the economy, in reference to current prices and inflation forecasts. “The numbers are not bad, considering Brazil's history, but they are above our targets,” Mr Schwartsman said.
Few economists expect a moderate rate increase to derail economic growth entirely this year. The government economic research institute on Wednesday forecast growth to reach 4.6 per cent, up from previous expectations of 3.5 per cent.
“Nobody would put in doubt the recovery because of a small adjustment in monetary policy,” said Octavio de Barros, chief economist with Bradesco, the country's largest private bank. He said inflationary pressure was “not generalised”, but mainly the result of one-off commodity and oil price shocks.
Still, an interest rate increase the first since February 2003 could damp the confidence that has dominated Brazil's business and financial sectors in recent weeks. “I am concerned it could negatively impact crucial corporate investment decisions and perhaps even slow economic growth in the last quarter,” said Armando Monteiro, head of the national industry confederation (CNI).
During Tuesday's independence day celebrations, Luiz Inácio Lula da Silva, the president, said Brazil was experiencing high “self-esteem” because its economy was exceeding forecasts and showing signs of sustainable economic growth.
Meanwhile, CUT, the leading union federation, proposed “an accord between government, unions and industry to ensure sustain able economic growth with price stability”, said Celso Horta, CUT adviser. Yet he denied suggestions in the local media that CUT favoured price controls.
Earlier this week Mr Lula da Silva said the “construction of a new social contract with economic growth and inflation targets” was every thing that Brazil needed.
Yet businesses leaders all but ruled out such ideas. “Anything that smacks of anti-market, we will not support. It doesn't work,” said the CNI's Mr Monteiro.
