Brazil inflation lowest in over two years amid calls for rate cuts

By Gabriel Araujo

SAO PAULO (Reuters) -Consumer prices in Brazil decelerated more than expected in May, government data showed on Wednesday, with 12-month inflation hitting its lowest in more than two years as it dropped below the 4% mark for the first time since late 2020.

The figures look to add weight to calls by the government and business people for the central bank to lower interest rates from their current six-year high of 13.75%.

Annual inflation in Latin America’s largest economy hit 3.94% in May, statistics agency IBGE said, below the median forecast of 4.04% in a Reuters poll of economists, reaching its lowest since October 2020.

Markets responded well, with the benchmark stock index gaining 1%, trading above 115,000 points for the first time since November 2022, while interest rate futures dropped sharply. The real strengthened 0.1% against the dollar.

Brazil’s Planning Minister said in a statement the lower-than-expected figures prove that a disinflationary process is underway in the country, even with unfavorable base effects expected to trigger an inflation uptick starting July.

Pantheon Macroeconomics economist Andres Abadia highlighted in a note to clients that with inflation dropping overall, “leading indicators are pointing to a benign outlook in the near term, opening the door for rate cuts as soon as Q3.”

Brazil’s central bank has kept its benchmark rate at 13.75% since September to control inflation, attracting criticism from President Luiz Inacio Lula da Silva, who sees it hindering economic growth.

Central bank chief Roberto Campos Neto said this week there was still “a problem” with long-term inflation forecasts, with a central bank survey not foreseeing prices to meet their target until beyond 2024, despite being expected to start declining soon.

The central bank currently targets inflation of 3.25% for 2023 and 3% for 2024 and 2025, with a tolerance margin of 1.5 percentage points on either side.

“The fall in inflation last month alongside the strong support for the government’s new fiscal framework has strengthened the arguments in favor of interest rate cuts,” Capital Economics’ Kimberley Sperrfechter said.

“But we don’t think that monetary easing is imminent,” she added, forecasting rate cuts to start only in November as inflation is seen resuming an upwards path over the second half of the year.

Consumer prices as measured by the benchmark IPCA index, according to IBGE, rose 0.23% in May from the previous month, an eight-month low, also below market forecasts of 0.33%.

The monthly increase was driven by higher food and housing costs, which were partially offset by a drop in transportation prices, the statistics agency said.

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