Lower inflation raises pressure on Central Bank

Brazilian consumer prices aren’t climbing as quickly as they once were. The IPCA benchmark index rose by 0.23 percent in May — below market expectations for the month and a steep drop from April inflation (0.61 percent). 

In the 12 months to May, prices climbed by 3.94 percent, a rate that has decelerated in each of the past 11 months.

The latest data strengthens analysts’ belief that the Central Bank will probably start cutting the country’s benchmark interest rate, the Selic, from its current levels of 13.75 percent, by the third quarter of this year. 

“The bank will not make a policy about-face in June,” economist André Perfeito told followers in his Telegram channel. “But I expect to see [the bank’s policy meeting minutes] bringing clear signals that monetary easing is about to come.”

May inflation was driven by higher costs with health and personal care items, notably healthcare plans, whose premiums became 1.20 percent more expensive. Housing costs, which include utilities, also weighed on May inflation with a 0.67 percent rise due to higher tariffs in several metropolitan areas.

Food inflation, which is extremely punishing to poorer families that use a large chunk of their income for basic products, continued to decelerate too. In May, costs with food and beverages rose by 0.16 percent — down from 0.71 percent just a month prior. 

Among all segments, prices for housing items and transportation saw price reductions — the latter as a result of cheaper airfares and fuel.

Medium and short-term inflation forecasts

Inflation forecasts for 2023 fell from 6.02 percent four weeks ago to 5.69 percent last Monday, according to the latest Central Bank Focus Report — a weekly survey of the country’s leading financial institutions.

Central banks operate monetary policy looking 18 months or more ahead, working with financial models designed to capture whether market expectations are “anchored,” meaning unchanged over time. That was not the case in the last meeting of the bank’s Monetary Policy Committee in early May. 

The minutes of that meeting suggest that rate hikes are a “less likely scenario” but that no cuts should be expected in the near term. Looking at the external market, the bank stressed that most monetary authorities are signaling a prolonged period of high interest rates to fight inflationary pressures, which also requires greater caution from emerging countries. 

Furthermore, the Central Bank stressed, again, that there was no “mechanical relationship” between the approval of the new fiscal framework and inflation convergence. Only when it perceives a change in inflation expectations in its projection models will the Central Bank begin to change the course of the country’s monetary policy.

Approved last week in the lower house of Congress, the new fiscal rules still need to go through the Senate, which should happen next week. The next Copom meeting is scheduled for June 20. While analysts are eager to see how the monetary policy committee members read the latest inflation and first-quarter GDP growth figures, none expect any changes in the Selic rate quite yet.

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