Brazil June Inflation Slows More Than Forecast by Analysts

  • Inflation slowing but still far from target, says Goldfjan
  • Food inflation slows modestly as prices of beans soar

Brazil’s consumer prices rose less than analysts forecast in June as new central bank chief Ilan Goldfajn pledges to bring inflation to the government’s target by the end of next year.

The benchmark IPCA consumer price index climbed 0.35 percent after a 0.78 percent rise the previous month. That was lower than the median forecast for a 0.37 percent increase from 42 economists surveyed by Bloomberg. Twelve-month inflation decelerated to 8.84 percent, from 9.32 percent in May.

“The IPCA was good news, but inflation remains at a very high level and expectations are way above target for 2017,” Daniel Weeks, chief economist with Garde Asset Management, said by e-mail. “The central bank will watch for progress on the fiscal side and on inflation expectations. I don’t think there will be room for a cut in interest rates any time soon, considering those two factors.”

The government announced on Thursday it will reduce its budget deficit before interest payments to 139 billion reais ($41 billion) in 2017, sending a positive message to investors. Still, market expectations for a cut in the benchmark Selic rate in the short term were little changed, with the swap rate contract maturing in January 2017 dropping 2 basis points to 13.89 percent.

Inflation has been slowing but remains “far” from the 4.5 percent target set by the government, Goldfajn said in a TV interview Thursday night. Reaching that target by end-2017 is “ambitious and credible at the same time,” he told reporters in Brasilia on June 28.

Food and beverage prices rose 0.71 percent in June, following 0.78 percent increase the previous month. Beans, a staple of Brazilian cuisine, soared 41.78 percent in price, adding to food inflation. Inflation for health and personal care products slowed to 0.83 percent, nearly half the previous month’s pace of 1.62 percent.

As Goldfajn works to shore up the central bank’s credibility following years of missed inflation targets, the market is watching for a window to lower interest rates and help spur Latin America’s largest economy. While he has said that easing monetary policy needs to be done responsibly, Acting President Michel Temer told journalists last month he hopes borrowing costs will fall this year.

The National Monetary Committee in its meeting last week decided to maintain the bank’s same inflation target for 2018, although the tolerance band will narrow next year to plus or minus 1.5 percentage points. The committee includes Goldfajn and Finance Minister Henrique Meirelles.

The central bank currently targets inflation of 4.5 percent, plus or minus two percentage points. It hasn’t fallen within that range since the end of 2014, which prompted the bank under its former president to lift the benchmark rate to its highest level since 2006. The economy has suffered in part due to the steeper borrowing costs. It is forecast to shrink 3.35 percent in 2016 following a 3.8 percent contraction last year, according to a weekly central bank survey.

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