Slowest Brazil Inflation in Two Years Boosts Rate Cut Bet

  • Consumer inflation slows more than all forecasts in September
  • Data “seals the deal” on October rate cut: Capital Economics

Brazil’s consumer inflation rose at its slowest pace in more than two years as food prices dropped, fueling bets that the central bank is about to start easing monetary policy.

The benchmark IPCA consumer price index in September rose 0.08 percent after a 0.44 percent gain the previous month. That is less than estimated by all 43 economists in a Bloomberg survey, whose median forecast was for a 0.18 percent increase. Inflation in the 12 months through September slowed to 8.48 percent.

The data not only consolidated wagers that the central bank will start easing monetary policy on Oct. 19, but also encouraged some traders to bet that the bank may make a larger cut to the benchmark Selic rate, currently at a 10-year high of 14.25 percent. Traders in the interest-rate futures market are now split between a reduction of 25 basis points or 50 basis points, according to Bloomberg data.  

Most economists are forecasting a 25 basis-point cut to the Selic, following the monetary authority’s quarterly inflation report and a series of better-than-expected consumer price figures.

Leading the slowdown in September inflation were food and beverage prices, which fell 0.29 percent in the month, following a 0.3 percent increase in August. Most of the consumer price gains came from housing, which rose 0.63 percent following a 0.3 percent increase in the previous month.

Right Direction

Central bank chief Ilan Goldfajn said the IPCA reading shows signs that the food-price shock that boosted inflation in recent months is receding. “Of course inflation can go up, go down, but at least the last month is in the right direction,” he said on Friday at an event in Washington, where he is attending the fall meeting of the International Monetary Fund.

Goldfajn reiterated that the central bank has “no fixed timeline” for easing monetary conditions and that the bank aims at bringing inflation down to the official 4.5 percent target next year. Economic models are already showing that disinflation is coming, he said. “But Brazil is Brazil, so we need to be careful.”

Economists sounded more optimistic. “The bigger-than-expected drop in Brazilian inflation in September should be enough to seal the deal on an interest rate cut at this month’s meeting,” Neil Shearing, chief emerging markets economist with Capital Economics, wrote in an research note.

Lower borrowing costs could help spur the economy that is mired in a second year of recession. The central bank’s quarterly inflation report released Sept. 27 said consumer prices would rise only 4.4 percent next year, which would mark the first time they come in below target since 2009.

The monetary policy committee will meet Oct. 18-19. Economists surveyed weekly by the central bank are forecasting a 25 basis-point reduction to the Selic.

Before it's here, it's on the Bloomberg Terminal.