UPDATE 3-Brazil inflation spike fans bets of interest rate hike
* IPCA index rises 0.86 percent in January
* Monthly inflation highest since April 2005
* Twelve-month inflation edges up to 6.15 percent
* Central bank says it is worried, uncomfortable
* Cigarettes up more than 10 percent
SAO PAULO, Feb 7 (Reuters) - Brazil's inflation accelerated to the fastest rate in nearly eight years in January, raising bets of an interest rate hike this year which could complicate the government's campaign to revive a near-stagnant economy. The Brazilian currency, the real hit a 9-month high, after central bank president Alexandre Tombini said he was worried about inflation, prompting market speculation that policymakers may resort to a stronger currency to help curb the prices of imports. The country's benchmark IPCA consumer price index rose 0.86 percent in January, the highest monthly reading since April 2005, government data showed on Thursday. In the 12 months through January, inflation rose to 6.15 percent, the highest reading in a year. The government targets inflation at 4.5 percent, with a tolerance margin of plus or minus 2 percentage points. Interest rate futures rose across the board in the BM&FBovespa exchange, suggesting more bets that the central bank would raise its benchmark interest rate, which had been cut to an all-time low of 7.25 percent to stimulate economic growth. In an interview posted on O Globo website, central bank president Alexandre Tombini said he is feeling uncomfortable. "Inflation worries us in the short term. It's very resilient, but it's not out of control," Tombini told O Globo financial journalist Miriam Leitao. Asked whether it was time for the central bank to adjust its monetary policy, Tombini said he is "paying attention to inflation.". The Brazilian real strengthened about 0.9 percent to 1.97 reais to the dollar after the publication of Tombini's remarks. Food and cigarettes were the main inflation drivers, though analysts noted accelerating price rises for nearly three of every four product categories. Core measures were also stronger than in the same month a year ago, suggesting the recent inflation spike is not likely to fade quickly. The number highlights the challenge facing President Dilma Rousseff, whose government has been trying to jump-start the economy, following two years of mediocre growth, with a delicate balance of record-low interest rates, a weaker currency and looser budget policy. Economic activity has shown little signs of recovery so far, with manufacturing and business investment still lagging behind growth in consumer spending. Now, with 12-month inflation dangerously near the top end of the official target, policymakers will have less leeway to stimulate the economy. "If inflation worsens in the next two or three months, that can lead to a monetary tightening later," said Carlos Kawall, chief economist at J.Safra, in Sao Paulo. Brazil is alone in its struggle against inflation among the largest market-friendly Latin American economies. Inflation has subsided elsewhere in the region, such as in Mexico and Chile, as a spike in global food prices fades.
The central bank cut interest rates ten straight times through October 2012, to 7.25 percent, saying Brazil no longer needed one of the highest borrowing costs in the world to tame inflation. With low interest rates a top priority for President Rousseff, the government has been trying to use other tools to fight price rises, such as tax breaks. A government-sponsored reduction in electricity power rates prevented January inflation from reaching 1 percent, said Juan Jensen, an economist with Tendencias Consultoria in Sao Paulo. It should also limit the monthly price rise in February, though annual inflation is expected to remain above 6 percent - and possibly even breach the target ceiling - by at least mid-year, economists said. The government is also mulling tax cuts on food staples, Rousseff and Finance Minister Guido Mantega said recently. Such measures will probably force the government to miss a key budget target this year. The January IPCA index had been expected to rise 0.84 percent, from an increase of 0.79 percent in December, according to the median forecast of 31 economists surveyed by Reuters. Forecasts for the rise ranged from 0.78 to 0.90 percent. Personal expenses rose 1.55 percent from December; the category includes cigarettes whose prices spiked 10.11 percent. Food prices rose 1.99 percent.
Below is the result for each price category:
January December- Food and beverages 1.99 1.03- Housing -0.20 0.63- Household articles 1.15 0.27- Apparel -0.53 1.11- Transport 0.75 0.75- Health and personal care 0.73 0.40- Personal expenses 1.55 1.60- Education 0.35 0.19- Communication -0.08 0.03- IPCA 0.86 0.79