Brazil’s Inflation Slows More Than Expected on Weak Growth

Brazil’s inflation through mid-June slowed more than analysts forecast, cementing expectations the central bank will further reduce the benchmark interest rate to reignite growth.

Consumer prices rose 0.18 percent in the month through mid-June, the national statistics agency said today in Rio de Janeiro. The number was lower than every estimate of 42 analysts surveyed by Bloomberg, whose median forecast was for an increase of 0.29 percent. Annual inflation as measured by the IPCA-15 price index decelerated for a ninth straight month to 5 percent.

Since August, the central bank has reduced the benchmark rate by four percentage points to a record low 8.5 percent, saying slower global growth will have a disinflationary impact on Brazil. Traders expect the Selic rate to be cut to 7.75 percent this year as the government tries to offset fallout in Latin America’s biggest economy from the European debt crisis, futures show.

“We are likely to go through a phase of inflation under control, which will leave the central bank at ease to continue to cut interest rates,” Luciano Rostagno, chief strategist at Banco WestLB do Brasil SA, said in a phone interview from Sao Paulo. “The international outlook remains quite uncertain.”

The yield on interest rate future contracts maturing in January 2014 was unchanged at 8.08 percent at 10:22 a.m. in Sao Paulo. The real declined 0.2 percent to 2.0306 per U.S. dollar.

Reignite Growth

Economists predict that the government’s effort to rekindle growth with record low borrowing costs, reduced taxes and credit stimulus will prevent inflation from slowing toward its 4.5 percent target in 2012 and 2013. Brazil’s economy will be expanding at the beginning of next year at the fastest pace since the last quarter of 2010, central bank President Alexandre Tombini said June 19.

Record low unemployment will help sustain domestic demand, allowing the country to expand more than 4.5 percent in the first quarter of 2013 from a year earlier, Tombini said.

In the first three months of this year, the economy grew 0.75 percent from the same period a year ago, its worst performance since a 1.47 percent contraction in the third quarter of 2009.

Unemployment fell to 5.8 percent in May, a historical low for the month, the statistics agency said in a separate report today. The median estimate of 35 analysts surveyed by Bloomberg was for the jobless rate to remain at 6 percent.

‘Temporary Relief’

“We are seeing a temporary relief in inflation,” Flavio Serrano, senior economist at Espirito Santo Investment Bank, said in a phone interview from Sao Paulo. “In the medium term, we continue to be concerned because inflation will quicken again.”

Without the tax cut on car sales announced last month and due to expire by the end of August, consumer prices would have increased 0.34 percent, Serrano said. Speculation the government plans to increase gasoline prices also raises doubts that inflation will continue to converge to the 4.5 percent target, he said.

Consumer prices will rise 5 percent this year and 5.5 percent in 2013, according to the median estimate in a June 15 central bank survey of about 100 analysts. The bank targets inflation of 4.5 percent plus or minus two percentage points.

Tombini said inflation, which has remained above 4.5 percent for the past 22 months, will continue to slow toward its target even as growth accelerates.

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