Brazil Sees Inflation on Target for First Time Since 2009

  • Consumer prices to increase 4.4 percent next year, BCB says
  • BCB sees improvement on fiscal reforms, retail food prices

Inflation in Brazil will hit the official target next year for the first time since 2009, and conditions for an easing of monetary policy are improving, the country’s central bank said on Tuesday. Swap rates fell.

"Price development shows evidence that disinflation is under way," the bank said in its quarterly inflation report published on its website.

The cost of living will rise 4.4 percent next year in the reference scenario, below the 4.5 percent inflation target and the bank’s previous forecast of 4.7 percent. The bank presided by Ilan Goldfajn sees improvement in two of the three conditions it established for cutting the benchmark interest rate from the current level of 14.25 percent.

"What it showed in the inflation report is that the cut is close," Enestor dos Santos, principal economist at BBVA bank, said in a phone interview from Madrid. "The central bank made it clear that, despite advances on food prices, there’s still a last obstacle to a rate cut, which is the fiscal situation."

While there are positive signs on the advances of spending caps proposed by President Michel Temer, "uncertainties regarding the approval and implementation of necessary measures remain," the bank said.

Investors in the swaps market have increased bets in recent weeks that policy makers will reduce the key rate next month for the first time since 2012, though Goldfajn has provided no guarantees. He instead has said in public remarks that monetary easing will hinge on several variables, including the impact of Brazil’s recession on consumer prices and confidence that the government can win approval of austerity measures that would cool inflation.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest rate moves, fell 0.07 percentage point to 12.15 percent at 9:49 a.m. local time. The real gained 0.7 percent to 3.2207 per U.S. dollar.

Retail food prices are falling but there are "inconclusive signs" regarding the speed of disinflation among other prices sensitive to monetary policy, such as in the services sector, the bank said.

For an analysis of central bank policy, click here.

Goldfajn, who quit his job as chief economist at Itau Unibanco Holding SA to run the central bank in June, has presided over two rate meetings. He twice held benchmark borrowing costs at a 10-year high, while changing the institution’s communications strategy by publishing longer communiques with a deeper analysis of inflationary risks and economic conditions.

Investors have applauded his approach. Two-year breakeven inflation rates -- based on the difference between nominal and inflation-linked bonds -- have dropped to the lowest level in three years, while volatility on interest-rate swaps has subsided. Economists surveyed weekly by the central bank have also reduced their consumer price outlook for 2017.

Yet major challenges remain, as inflation persists at almost double the official target. Consumer prices will increase 7.3 percent in 2016, exceeding the 6.5 percent ceiling of the inflation target, according to Tuesday’s report.

Many lawmakers are reluctant to approve government proposals to reduce expenditures amid a crushing economic downturn. The central bank forecasts gross domestic product will shrink 3.3 percent in 2016, which would be the second straight year of recession.

— With assistance by Walter Brandimarte, Bruce Douglas, and Matthew Malinowski

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