👀 Ones to watch: Undervalued stocks to buy before they report Q3 earningsSee Undervalued Stocks

Brazil's inflation falls to more than 2-year low amid calls for rate cuts

Published 06/07/2023, 09:32 AM
Updated 06/07/2023, 01:21 PM
© Reuters. A man pays a vendor at a fruit stand, at a supply centre (CEASA) in Brasilia, Brazil May 9, 2023. REUTERS/Adriano Machado
IBOV
-

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 level in more than two years and dropping below the 4% mark for the first time since late 2020.

The figures are likely to add weight to calls by President Luiz Inacio Lula da Silva's government and business people for the central bank to lower its key interest rate from the 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 and the lowest level since October 2020.

Markets responded favorably, with the benchmark stock index Bovespa gaining 1% to trade 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 Ministry said in a statement the lower-than-expected inflation data proved that a disinflationary process was underway in the country, even with unfavorable base effects expected to trigger an uptick starting July.

Credit Suisse economists revised their 2023 inflation forecast to 5.0% from 5.5%, moving forward their call for the start of the monetary easing cycle from September to August, with a 25-basis-point rate cut in sight.

Brazil's central bank has kept its benchmark rate at 13.75% since September to control inflation, triggering criticism from Lula who sees it as 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 the 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.

Natalia Gurushina, chief emerging markets economist at VanEck, said the latest consumer prices reading means that Brazil is now on "the final countdown" to rate cuts.

Others, however, took a more cautious approach.

"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," said Kimberley Sperrfechter, an economist who focuses on Latin America at Capital Economics.

"But we don't think that monetary easing is imminent," she added, forecasting rate cuts to start only in November.

© Reuters. A man pays a vendor at a fruit stand, at a supply centre (CEASA) in Brasilia, Brazil May 9, 2023. REUTERS/Adriano Machado

Brazilian 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. That was also below market forecasts of a rise 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.

Latest comments

Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.