RIO DE JANEIRO, Nov. 26 (UPI) -- Inflation continues to jump in this country, fueling concern among investors that interest rates -- already among the highest in the world -- may increase even more.
Rising prices for fuel and food were blamed Tuesday as the government reported inflation of 2.08 percent for the month ending Nov. 15., as compared to 1.31 percent for the month ended Oct. 31.
The latest inflation number falls at the high end of analyst predictions.
Inflation for the 12 months ending Nov. 15 was 9.27 percent, while the upper limit of the government's inflation target for 2002 is 5.5 percent. The goal for 2003 is 4 percent, with a toleration band of 2.5 percent.
The central bank earlier this month increased interest rates by 100 basis points to 22 percent from 21 percent, citing worries about inflationary pressure.
The government said food prices rose 4.47 percent for the month ending Nov. 15, while the cost of fuel jumped 5.23 percent.
The main culprit for inflation, analysts say, is the more than 30 percent drop in the local currency -- the real.
Most worrying for many is that inflation is being seen in areas where the level of imported products or parts -- those with prices denominated in the dollar -- is low.
The inflation woes add to the weight of concerns amid the winning campaign of leftist President-elect Luiz Inacio Lula da Silva, whose poll-leading presence in this year's presidential contest prompted investor anxiety about Brazil's economic direction.
Since his Oct. 27 election to lead Latin America's largest economy, Lula, as the president-elect is known, has kept his plans for economic direction hushed, though he and his top aides have signaled they are sticking with austerity.
Of utmost concern is who will be named to fill key economic posts, such as the next president of the central bank.
That official will be given the unenviable task of keeping inflation down, foreign reserves up and helping the currency recover.
"Depending on the incoming team and the credibility of the new policy, the high level of inflation expectations could be validated, turning the task of fighting inflation into a harder one," said Gustavo Reis, an analyst with the Rio de Janeiro-based investment bank Pactual.
Reis said that after a steep drop in the local currency last year, there was a point when the Brazilian currency stabilized, allowing for a decrease in inflation.
"Now, we don't think we can say that the exchange rate has stabilized," he said. "Uncertainty about the path of the exchange rate and the quality of the new monetary policy toughens our job of forecasting inflation."
On Tuesday, Antonio Palocci, the leader of Lula's transition team, said the next head of the central bank may be named as soon as next week.
That news comes as the honeymoon for Lula with the markets nearing an end, with investors tired of waiting for concrete clues on economic policy.
The rumored list of potential presidents for the bank is a mix of moderate, free-market minded former corporate officials and those leaning more toward the left end of Lula's Workers' Party.
Conventional wisdom says that the pragmatic sway of Palocci -- whose moderate talk has cheered investors -- will win out in the decision.
That could mean an official who won't frighten investors will take over for the current central bank President Arminio Fraga, the former fund manager for George Soros who has steered Brazil's fiscal policy since its 1999 devaluation.
Whoever gets the nod to lead the central bank faces a daunting task.
While interest rates may again need to be raised to fight inflation, that must be countered with the knowledge that a big chunk of Brazil's $230 billion debt is linked to floating interest rates.
When rates are raised, it adds to Brazil's debt burden, which in turn sparks investor concern.
That leads to the flight of foreign capital as more emerging market investors -- already a rare breed these days -- yank their cash and leave for safer climes.