Brazil consumer prices pick up in September amid drought

By Luana Maria Benedito

SAO PAULO, Oct 9 (Reuters) - Consumer prices in Brazil accelerated in September from the previous month due to higher electricity and food costs amid a major drought, reinforcing expectations of further interest rate hikes by the country's central bank.

Prices as measured by benchmark inflation index IPCA rose 0.44% in September, government statistics agency IBGE said on Wednesday, nearly in line with the 0.46% increase expected by markets but well above the 0.02% fall seen in August.

In the 12 months through September, consumer prices in Latin America's largest economy were up 4.42%. Economists polled by Reuters were expecting an increase of 4.43%.

According to IBGE, the inflation figures were boosted by a 5.36% jump in residential electricity prices, as the drought affects power costs since more than half of country's supply comes from hydroelectric plants.

Food and beverage costs also weighed in September with a 0.50% increase, interrupting a two-month streak of negative readings as meat prices ticked up.

"The strong drought and dry weather were factors that contributed to the decrease in (meat) supply," said IBGE survey manager Andre Almeida. "The off-season period is being intensified by the climate situation."

Finance Minister Fernando Haddad told reporters on Wednesday that the fresh IPCA data clearly showed the drought is affecting energy and food prices, but added core inflation was "under control."

According to XP economist Alexandre Maluf, short-term inflation in Brazil still appears to be relatively well-behaved, but "economic fundamentals suggest that we should not see a convergence towards the target in the coming quarters."

Brazil's central bank pursues a 3% inflation target, which has a tolerance margin of plus or minus 1.5 percentage points.

Amid unanchored inflation expectations and stronger-than-expected economic activity, the central bank's rate-setting committee, known as Copom, kicked off an interest rate-hiking cycle last month with a 25 basis-point increase and signaled more tightening ahead.

Jason Tuvey, deputy chief emerging markets economist at Capital Economics, said September's inflation data "will reinforce the hawkishness of Copom and further hikes to the Selic rate lie in store... We expect further increases to the Selic to 12.00% by early 2025."

Brazilian interest rate futures on Wednesday priced in a 95% chance of a 50 basis-point rate hike at the central bank's next policy meeting, in November. (Reporting by Luana Maria Benedito; Editing by Gabriel Araujo and Jonathan Oatis)