Double-digit inflation in Brazil fuels bets on bigger rate hikes

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(Bloomberg) – Brazil’s annual inflation has exceeded double digits for the first time since 2016, fueling a debate over the need for more aggressive interest rate hikes in Latin America’s largest economy.

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Consumer prices jumped 10.05% in mid-September from a year ago and 1.14% from the previous month, the national statistics institute reported on Friday. Economists were expecting a monthly increase of 1.04%, according to a Bloomberg poll.

The increase was due to transportation costs which jumped 2.22% from the previous month and food prices which climbed 1.27%. Brazil’s central bank is targeting inflation at 3.75% for this year and 3.5% for 2022.

Swap rates on the contract maturing in January 2022, which indicate market expectations for the benchmark rate at year-end, rose 4.5 basis points as investors anticipated a rate hike guiding more than 119 basis points next month.

Policymakers have already increased borrowing costs by 425 basis points since March and said on Wednesday that another one percentage point increase was needed to contain price shocks. Their efforts to curb inflation have been complicated by a major drought that has pushed up electricity bills and more expensive services as Covid-19 restrictions are lifted.

Read more: Brazil sets cruising speed of rate hike at 100 basis points

At the same time, the national currency has weakened as investors worry about government spending ahead of President Jair Bolsonaro’s re-election campaign.

Alexandre Lohmann, economist at Constancia Investimentos, said climate change risks have not yet been sufficiently addressed by policymakers, complicating their rate hike schedule.

“This will make the central bank’s position very difficult and the debate on a rate hike of 125 basis points will be very strong.”

(Recast story with market reaction and quote from economist)

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