| SANTIAGO/SAO PAULO
SANTIAGO/SAO PAULO Inflation quickened in Brazil and Chile in January on rising food and transport costs putting more pressure on central bankers to push interest rates higher.
The increases hardened market expectations of rate hikes at the next monetary policy meetings in both countries. Brazil and Chile are among a slew of emerging market countries that have already tightened monetary policy to fight inflation fueled by higher global prices for food and commodities.
China raised interest rates on Tuesday for the second time in just over six weeks. Last month, developing countries India, Thailand, Peru and Israel raised rates. The U.S. Federal Reserve and European Central Bank have also voiced concerns about inflation.
Brazil's benchmark IPCA consumer price index jumped 0.83 percent in January after rising 0.63 percent in December, the data released on Tuesday showed.
"In Brazil, the genie is out of the bottle and the authorities need to tighten policy, ideally fiscal, in order to get a grip on the inflation dynamics," said Alberto Ramos, a senior economist at Goldman Sachs in New York.
Finance Minister Guido Mantega said the sharp rise in January was due to a combination of global commodity prices and seasonal effects. He expects inflation to slow down in coming months.
The yield on Brazilian interest rate futures contracts due April 2011, which reflects expectations for interest rates at the end of March, rose to 11.42 percent from 11.415 percent on Tuesday. That yield fully prices in the chance of a 50 basis point rate hike at the central bank's next monetary policy meeting on March 2.
Chile's consumer price index rose 0.3 percent as expected in January on rising fuel and tobacco prices. Although there is less concern about inflation in Chile than in
Brazil, analysts were nearly unanimous in a Reuters poll in predicting a rate hike at the central bank's meeting on Feb. 17.
Rate hikes are likely to increase upward pressure on both countries' currencies, upsetting exporters and manufacturers.
Brazil's real is trading near September 2008 highs, while Chile's peso is within striking distance of near 3-year highs despite central bank intervention to tame its strength.
The real was 0.7 percent firmer on Tuesday. The Chilean peso also gained ground before falling back to close unchanged.
Economists in Brazil have steadily raised their outlook for inflation this year. In the most recent weekly survey by the central bank, analysts lifted their forecast for the 2011 IPCA index to 5.66 percent -- a ninth straight upward revision.
Brazil's central bank is targeting 2011 inflation of 4.5 percent, plus or minus 2 percentage points, after the IPCA index closed 2010 at 5.91 percent, a six-year high.
DILEMMA: RATES VS CURRENCY
Brazil's new president, Dilma Rousseff, and new central bank president, Alexandre Tombini, are under pressure to show they can be tough on inflation and government spending. Rousseff's government is expected to detail budget cuts this week. Even firm action would be unlikely to change the outlook for higher interest rates in the short-term.
"In Brazil, it's about food and energy prices," said David Rees, an emerging markets economist at Capital Economics in London. "Even if there's a significant fiscal tightening, they're probably still going to have to raise rates in March before any tightening gains traction."
Brazil's central bank hiked the benchmark Selic lending rate by 50 basis points to 11.25 percent in January in an attempt to contain speeding consumer prices. Economists expect the Selic rate to end this year at 12.5 percent, among the highest in the world.
Higher rates have sent the real surging as investors borrow money at near-zero rates in struggling developed nations such as the United States and Japan, and pour it into Brazil.
Chile's central bank says it is worried about international food prices and is wrestling over whether to raise rates to counter inflation or hold them to support a $12 billion currency intervention aimed at taming the strong peso.
It held its key rate at 3.25 percent in January, pausing after seven straight increases. But the peso has now clawed back more than half of the 7 percent initially lost after the central bank its currency market intervention.
"The central bank knows it can't change the (peso's) trend," said Matias Madrid, chief economist with Santiago-based Banco Penta. "Inflation expectations for 2011 are around 4 percent or more, so they have to raise the policy rate by 25 basis points."
Central bank president Jose De Gregorio said last month the bank was worried about rising inflation and its monetary policy will not be dictated by the exchange rate.
(Additional reporting by Antonio de la Jara, Fabian Cambero, Moises Avila, Brad Haynes and Maria Jose Latorre in Santiago, Rodrigo Vida Gaier in Sao Paulo and Isabel Versiani in Brasilia; Editing by Kieran Murray and Andrew Hay)