Brazil’s Inflation Undershoots Forecast After Key Rate Cuts

Brazil’s annual inflation sped up less than expected after the central bank signaled it will maintain a steady pace of monetary easing through year’s end.

(Bloomberg) — Brazil’s annual inflation sped up less than expected after the central bank signaled it will maintain a steady pace of monetary easing through year’s end.

Government data released Wednesday showed consumer prices rose 5.19% in September from a year earlier, less than the 5.25% median estimate of analysts surveyed by Bloomberg. Monthly inflation stood at 0.26%.

The central bank has been applying half-percentage point cuts to the benchmark Selic, lowering it to 12.75% last month, after reversing the jump in consumer prices that accompanied the re-opening of the Brazilian economy. Inflation is now picking up again due to base effects and higher energy costs, though analysts expect cost-of-living increases to cool in coming weeks.

What Bloomberg Economics Says

“September’s CPI report was mostly benign and should see Brazil’s central bank proceed as planned with a 50-basis-point rate cut to 12.25% at its Nov. 1 meeting. Year-over-year inflation accelerated, but that was broadly expected due to base effects.”

— Adriana Dupita, Brazil and Argentina economist

— Click here for full report 

Policymakers have made clear that significant inflation surprises would need to occur for them to speed up the current pace of easing. However, the year-on-year reading has now risen for three straight months and economic growth continues to outperform expectations.

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Six of nine groups of goods and services tracked by the statistics agency became more expensive in September. The gains were driven by a 1.4% jump in transportation costs, which were lifted by rising prices of gasoline and airplane fares. Meanwhile, food and beverage fell 0.71%.

Annual inflation has now bounced back above the upper bound of the central bank’s target range. Policymakers target cost-of-living increases at 3.25% for this year, with a tolerance band of plus or minus 1.5 percentage points.

Analysts were bracing for price gains across sectors following hikes to fuel costs from state-controlled oil giant Petroleo Brasileiro SA in August. Services inflation, an indicator that policymakers watch closely, firmed on the month as the labor market in Latin America’s largest economy stays strong.

“The continued strength of services inflation supports our view that inflation and interest rates won’t come down as quickly as is widely anticipated,” William Jackson, Chief Emerging Markets Economist at Capital Economics, wrote in a research note published after the consumer price report.

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Further complicating hopes of steeper rate cuts, the recent surge in US Treasury yields is intensifying the weakening of the real, which has the potential to pressure consumer prices further.

President Luiz Inacio Lula da Silva plans to aggressively boost government spending next year — and doubts about how he will fund the 2024 budget are pushing long-term inflation expectations well above the central bank’s 3% consumer-price target for next year and 2025.

–With assistance from Giovanna Serafim and Robert Jameson.

(Adds inflation report details and analyst comments starting in fourth paragraph)

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