Brazil's consumer prices rose the most in more than two years last month, making it harder for the central bank to further cut Latin America's highest benchmark lending rate.

Consumer prices, as measured by the IPCA index, jumped 0.74 percent in December, the biggest increase since October 2005, the national statistics agency said. The gain, fueled by food prices, was almost twice the 0.38 percent increase in November and pushed the annual rate to 4.46 percent.
Policy makers ended two years of rate cuts on Oct. 17 after inflation quickened. With both economic growth and annual inflation accelerating, the central bank is unlikely to carry out more reductions to the overnight rate, which is already at a record low of 11.25 percent, and may be forced to raise rates later this year.
“We expect interest rates to be kept unchanged through 2008, with a considerable probability of an increase,” Hugo Penteado, chief economist at ABN Amro Asset Management in Sao Paulo, said in an interview on Bloomberg Television.
Brazil's annual year-end inflation accelerated for the first time in five years. The increase in the annual and monthly rates matched the median estimate from economists surveyed by Bloomberg. The real gained 0.5 percent to 1.7501 per dollar at 12:15 P.M. New York time. The currency gained 20 percent last year.
Food prices
Higher food prices accounted for most of the inflation increase, climbing 2.1 percent in December, the biggest gain since January 2003. Food prices climbed 10.8 percent last year and were responsible for almost half the increase in the annual rate.
Banco Itau BBA, the wholesale banking unit of Brazil's largest non-state bank, forecast policy makers may start increasing the so-called Selic rate as early as March to curb inflation. Alexandre de Azara, chief economist at the unit of Banco Itau Holding Financeira SA, said in a Jan. 9 interview that he expects the rate to reach 12.75 percent by year-end.
Brazil's central bank, led by Henrique Meirelles, targets annual inflation of 4.5 percent. A plus or minus 2 percentage point range can be used to accommodate unexpected price shocks. ABN Amro expects inflation to quicken to 4.8 percent this year, up from an earlier forecast of 4.3 percent.
Even the more optimistic analysts, such as Alex Agostini, at Austin Rate Servicos Financeiros, expect inflation to quicken at least through the first half of this year. Food will still be the main driver of inflation, though consumer demand may cause price increase in other sectors, he said.
“Companies will always try to gain a bit more by increasing prices when you have booming sales fueled by an improvement in income,” said Agostini, chief economist of the Sao Paulo-based ratings company. He doesn't expect a rate cut until September. Previously, he anticipated the central bank would reduce rates in June.
(Source: Bloomberg)