Brazil deepens inflation fight as strikes spread

BRASILIA (Reuters): Brazil cut a gas tax and bank workers joined a growing wave of strikes over wages, underscoring price pressures in Latin America’s biggest economy even as the central bank insisted inflation was under control.

The cut to the gasoline tax will let state-controlled energy company Petrobras improve its profit margins without resorting to a price increase at the pump for consumers, which would have made inflation even worse.

The rising IPCA price index has been one of President Dilma Rousseff’s biggest challenges during her first year in power. The index is up 7.33 percent in the 12 months through mid-September -- well above the government’s 6.5 percent target ceiling.

The IPCA has been above the target range of 4.5 percent, plus or minus 2 percentage points, since April. The combination of speeding inflation and Brazil’s slowing economy, plus the financial crisis in Europe, has rattled Brazilian financial markets in recent weeks.

Fuel costs have added to the inflation problems, and a heated labor market has caused concern for policy-makers such as central bank chief Alexandre Tombini as well.

Some investors have said that the central bank’s decision to cut its benchmark interest rate late last month was risky and geared mostly to fuel growth.

WORKERS’ BUYING POWER SOARS

While Tombini pointed on Tuesday to growing signs of a slowing economy, tight employment and surging wages are giving workers more money to spend on everything from new cars to home appliances.

Banks’ outstanding loans grew 1.7 percent in August from July, while the default rate inched higher to 5.3 percent, the central bank said on Tuesday. The bank increased its estimate for lending growth to 17 percent this year from previously 15 percent. Workers in a number of industries have either threatened to strike or have walked off the job unless their expectations are met for big wage increases.

The latest group on Tuesday were bank workers, who voted to start an indefinite strike. They joined the nation’s postal workers, who began a strike two weeks earlier. The bank workers are asking for a 12.8 percent wage increase, while the banks are offering 8 percent, local media reported.



The workers’ demands illustrate how many Brazilians are simultaneously trying to protect themselves from rising prices while cashing in on the economic boom of recent years. Both behaviors are likely to complicate policy-makers’ efforts to bring down inflation during coming months. Rousseff’s government has showed no signs of giving in to postal workers’ demands as it tries to contain spending and inflation.



Hefty adjustments expected for the country’s minimum wage next year are also feeding worries that the central bank will not be able to bring inflation back to the center of its target range of 2.5 percent to 6.5 percent in 2012.



TOMBINI CONFIDENT BEFORE CONGRESS



Despite the pressures, Tombini said in a central bank presentation to Congress on Tuesday that inflation was under control. That comes from both a slowing domestic economy and worries abroad, Tombini told lawmakers.



The central bank pointed to a euro-zone sovereign debt crisis and a faltering U.S. economy to explain the interest-rate cut to 12 percent from 12.5 percent. Tombini on Tuesday said the outlook abroad would be disinflationary until 2012, with commodities, after a spike earlier this year, a more benign factor.



Complicating the outlook for inflation, however, has been a weakening in Brazil’s currency, the real BRBY. A steepening of risk aversion abroad has taken the real to losses of 12 percent for the month against the U.S. dollar.



That has prompted speculation that the government could walk back some of its previous efforts to contain currency strength earlier this year. But Finance Minister Guido Mantega on Tuesday said that he was not considering changes to a tax on currency derivatives.



Economists in a weekly central bank survey now see the IPCA closing the year at 6.52 percent -- just above the target band. If that happens, Tombini is required to explain why that happened and what policy-makers will do about it.