Brazil Inflation Nears Target Band, Supporting Further Monetary Easing

• Brazil’s annual inflation rate slowed to 4.52% in mid-July, from 4.80% a month earlier, moving closer to the central bank’s target range and paving the way for a fourth consecutive interest-rate cut next week. The reading came in below all estimates in a Reuters poll of economists, whose median forecast was 4.67%.
• Brazil’s central bank targets inflation at 3%, plus or minus 1.5 percentage points, placing the upper end of the range at 4.50%. The latest reading was therefore only marginally above the ceiling and strengthened expectations of another interest rate cut when its interest rate-setting committee, known as Copom, meets on August 4–5.
• Policymakers lowered the benchmark interest rate by 25 basis points to 14.25% last month, marking the third consecutive reduction. According to Capital Economics, the softer inflation reading is likely to provide room for a fourth consecutive 25-basis-point cut at next week’s meeting.
• Consumer prices rose only 0.06% in the month to mid-July, slowing sharply from 0.41% in the previous month. The increase was also well below the 0.20% rise expected by financial markets.
• Higher housing costs were the main source of upward pressure, following a jump in electricity bills. However, food and beverage prices declined 0.66%, helping to offset the increase, while underlying indicators such as services inflation and core measures continued to show signs of deceleration.
• According to Inter chief economist Rafaela Vitoria, the data reinforced evidence that price pressures were easing and that there was no reason for Copom to pause its rate-cutting cycle. However, central bank Governor Gabriel Galipolo has warned that unanchored inflation expectations and resilient labour-market and economic activity support keeping monetary policy restrictive for longer.
• The weaker-than-expected inflation reading strengthens the case for a fourth consecutive 25-basis-point interest rate cut. However, Copom is likely to maintain a gradual pace, as inflation remains slightly above the upper end of the target range and policymakers remain concerned about inflation expectations, resilient domestic activity and volatility in the external environment.

(Source: Reuters)