Brazil's Inflation Slows More Than Forecast in February

  • Annual rate probably peaked last month, economists say
  • Markets speculate when the centrak bank will cut rates

Brazil’s consumer inflation slowed more than forecast in February and economists say the annual rate has probably peaked as a prolonged recession eats into Brazilians’ purchasing power.

The benchmark IPCA consumer price index rose 0.9 percent from the previous month, following a 1.27 percent jump in January. That was lower than the median forecast for a 0.98 percent increase from 43 economists surveyed by Bloomberg. Twelve-month inflation slowed for the first time since September, to 10.36 percent.

The central bank held borrowing costs unchanged earlier this month, anticipating that annual inflation would peak in the beginning of the year and then start to slow. Still, price increases remain in the double-digits, routing confidence and throwing a wrench into consumer spending, Brazil’s growth engine. The economy is mired in recession and the government’s agenda to restart activity has been undermined by impeachment proceedings and corruption scandals.

“Consumer inflation will continue to slow ahead, as the stimulus from increases in regulated prices in 2015 starts to fade, and the severity of the recession starts to kick in,” Andres Abadia, senior international economist with Pantheon Macroeconomics, wrote in a note to clients.

Brazil’s GDP fell 1.4 percent in the fourth quarter, capping a year in which the economy as a whole shrank 3.8 percent -- its worst performance in 25 years. Consumer spending, which accounts for nearly two-thirds of demand, fell 4 percent in the period. The statistics institute chalked up that decline to higher inflation, interest rates and joblessness, as well as less credit and income. Consumer confidence as measured by the Getulio Vargas Foundation has rebounded in recent months, but remains near its record low.

Major components of the IPCA index showed inflation was losing speed, with food and beverage prices rising 1.06 percent from the previous month, less than half the pace of January. Housing costs fell 0.15 percent in the same comparison with electricity prices dropping as abundant rainfall allows Brazil to rely less on expensive thermoelectric energy.

Swap rates on the contract due January 2017 fell 23 basis points to 13.83 percent in at 10:20 a.m. local time.

Investors are now speculating when the central bank will be able to cut the benchmark Selic rate, which has been kept unchanged for the fifth straight monetary policy meeting earlier this month. Local newspaper Valor Economico on Wednesday reported that the bank’s directors are already debating whether to reduce borrowing costs, without reaching a consensus yet.

At the bank’s latest meeting this month, two of the central bank’s eight directors dissented and cast their votes for a 50 basis-point increase to the Selic, which is already at its highest in nearly a decade. Minutes from the policy meeting will be released Thursday.

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