(Bloomberg) — Brazil’s annual inflation eased to its lowest level in nearly three years earlier this month, bolstering bets policymakers will slash the key interest rate by a half-point when they start an easing cycle next week.
(Bloomberg) — Brazil’s annual inflation eased to its lowest level in nearly three years earlier this month, bolstering bets policymakers will slash the key interest rate by a half-point when they start an easing cycle next week.
Government data released Tuesday showed consumer prices rose 3.19% in mid-July from a year earlier, down from 3.4% in mid-June and below the median estimate of 3.24% from analysts surveyed by Bloomberg. From the previous month, prices dropped 0.07%.
Swap rates on the contract due in January 2024, which indicate investor sentiment toward monetary policy at the end of this year, fell seven basis points in morning trading as traders mulled the possibility of steeper rate cuts.
The central bank has made significant progress in its fight against price pressures since 2022, when cost-of-living increases surged above 12%. A yearlong slowdown has brought annual inflation below the bank’s current 3.25% target, and board members have signaled that they will begin reducing double-digit borrowing costs at their August rate-decision meeting.
Darwin Dib, an economist at Gauss Capital, an asset manager in Sao Paulo, said Tuesday’s data should alleviate policymakers’ concerns and cement a half-percentage point cut next week.
“The most important aspect of the result was the clear reduction in core inflation, which the central bank worries so much about,” he said.
The mid-month drop was driven by a 0.94% decline in housing prices, thanks to lower utility bills, and a 0.4% fall in food and beverage costs. Meanwhile, transportation climbed 0.63% on rising fuel prices, according to the national statistics institute.
Toll
Central bankers have cited elevated readings of core inflation, which strips out volatile items like food and fuel, in their arguments to hold the benchmark Selic steady at 13.75% for nearly a year. But that stance has caused a significant drag on the Brazilian economy and drawn the ire of both President Luiz Inacio Lula da Silva and his economic team.
“The big question is how large the cut will be,” William Jackson, Chief Emerging Markets Economist at Capital Economics, wrote in a research note published after the inflation report. “We still think a 25 basis-point rate cut is most likely. But the chances of a 50 basis-point cut are increasing.”
Lula has blasted the monetary authority for keeping the Selic steady as working Brazilians suffer from tight credit conditions and companies stall.
High borrowing costs have taken a toll on consumers and businesses, resulting in soaring credit card rates and rising numbers of household defaults. While the economy proved resilient at the start of the year, it shrank more than expected in May, central bank data showed this month.
Progress on Lula’s major legislative proposals to shore up Brazil’s fiscal outlook and overhaul its tax code have also bolstered the government’s hopes that rate cuts are imminent.
Read more: Brazil’s House Backs Tax Reform, Sending Local Markets Rallying
Brazil Finance Minister Fernando Haddad told reporters last week that he expected “a recognition” of the government’s efforts from the central bank.
Analysts polled by the central bank see inflation accelerating to 4.9% by December, and easing back again to 3.9% at the end of next year, according to a weekly survey published earlier on Tuesday. They expect the Selic to fall to 12% by year-end and 9.5% by December 2024.
–With assistance from Giovanna Serafim, Rafael Gayol, Robert Jameson and Josue Leonel.
(Recasts lede and adds analysis throughout.)
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