Brazil’s inflation rate fell more than economists expected in May, pushing the annual pace below 5 percent for the first time since September 2010 and reinforcing bets for more rate cuts to shore up economic growth. Interest- rate futures fell.
Prices, as measured by the benchmark IPCA index, rose 4.99 percent in May from a year earlier, the national statistics agency said in Rio de Janeiro today. The increase was less than predicted by all but one of 33 analysts surveyed by Bloomberg, whose median estimate was for a 5.06 percent increase. Monthly inflation slowed to 0.36 percent from 0.64 percent in April.
Brazil’s growth outlook, until recently a bright spot for global investors, has deteriorated over the past month, as economists surveyed by the central bank reduced their median estimate for expansion this year to 2.72 percent from 3.23 percent. “We’ll be satisfied if we achieve growth in 2012 above growth in 2011,” Finance Minister Guido Mantega said last week, following expansion of 0.2 percent in the first quarter. The economy of the second-biggest emerging market after China grew 2.73 percent last year.
“The good news is inflation is falling, it’ll be closer to 4.5 percent than 5 percent,” Rafael Laurindo dos Santos, senior economist with Porto Seguro Investimentos, said by telephone from Sao Paulo. “The central bank got it right and will cut rates more.”
Citing limited inflation risks and a “fragile” international economy that helps slow consumer price rises, central bank President Alexandre Tombini last week cut the benchmark interest rate by 50 basis points to 8.5 percent. The bank has lowered the Selic rate by 400 basis points since August.
Traders expect policy makers to cut the rate to 8 percent in July before raising it to 9.5 percent by the end of 2013.
The yield on the interest rate futures contract maturing in January 2014, the most-traded in Sao Paulo today, fell seven basis points to 8.26 percent at 10:38 a.m. Brasilia time. The real strengthened 0.2 percent to 2.0179 per U.S. dollar.
President Dilma Rousseff’s government has increased subsidized credit by the state development bank BNDES and cut taxes on consumer and industrial goods. The latest round of stimulus measures last month included tax cuts on vehicles, sales of which plunged 11 percent in April.
A slowing services sector will be offset only in part by faster durable goods inflation, as a weaker real makes imported goods more expensive, Tony Volpon, head of emerging markets research for the Americas at Nomura Securities International Inc., said in a research note today. “This inflation reading should open the door for further rate cuts by the Central Bank of Brazil,” he said in a separate note after the announcement.
The Brazil Purchasing Managers’ Services index declined to 49.7 in May from 54.4 in April. Service price inflation slowed to 0.21 percent in May from 0.76 percent in April.
Despite Brazil’s weak economic performance over the past three quarters, inflation has remained above the 4.5 percent midpoint of the central bank’s target range for 21 months. As economic stimulus measures, including cuts in taxes and borrowing costs, take effect later this year, analysts predict annual inflation will accelerate again to 5.15 percent in 2012 and 5.60 percent next year, according to the latest central bank survey.
Transportation costs fell 0.58 percent in May after an increase of 0.1 percent in April and were the biggest contributor to slowing monthly inflation. Communications costs fell 0.19 percent compared with a rise 0.46 percent a month earlier. Food and beverage prices rose 0.73 percent, while housing costs were up 0.8 percent.
A 13 percent depreciation of the real since March has helped push up the cost of imports, including raw materials for agricultural and industrial goods. Policy makers have said that the impact of currency fluctuations on inflation has diminished in recent years and isn’t a concern.
In the minutes to its April 18 policy meeting the central bank said that any additional monetary easing should be carried out with “parsimony.” It will publish the minutes to last week’s Copom meeting on June 8.
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