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Brazil’s Double-Digit Inflation Fuels Bets on Bigger Rate Hikes

·2-min read

(Bloomberg) -- Brazil’s annual inflation broke double digits for the first time since 2016, fueling a debate on whether more aggressive interest rate hikes are needed 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 month prior, the national statistics institute reported on Friday. Economists expected a 1.04% monthly increase, according to a Bloomberg survey.

The increase was driven by transportation costs that jumped 2.22% from the month prior, and food prices that climbed 1.27%. Brazil’s central bank targets inflation at 3.75% for this year, and 3.5% for 2022.

Swap rates on the contract due on January 2022, which indicate market expectations for the benchmark rate at year-end, rose 4.5 basis points as investors priced in a key rate increase of over 119 basis points next month.

Policy makers have already lifted borrowing costs by 425 basis points since March, and on Wednesday said another full percentage-point hike is needed to contain price shocks. Their efforts to curb inflation have been complicated by a major drought that has caused electricity bills to spike, and by more expensive services as Covid-19 restrictions are removed.

Read more: Brazil Sets Rate Hike’s Cruising Speed at 100 Basis Points

At the same time, the nation’s currency has weakened as investors fret over public spending in the run-up to President Jair Bolsonaro’s re-election campaign.

Alexandre Lohmann, an economist at Constancia Investimentos, said that climate change risks haven’t been adequately considered by policy makers yet, complicating their rate-hiking schedule.

“This is going to make the central bank’s position very difficult and the debate to raise rates by 125 basis points will be very strong.”

(Recasts story with market reaction and economist quote)

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