Brazil Seen Cutting Rates Further as Annual Inflation Halved

(Bloomberg) -- Brazil’s annual inflation rate plunged to a four-year low in January, fueling bets the central bank will keep its aggressive pace of monetary easing for longer. Swap rates extended their recent declines.

The benchmark IPCA index climbed 0.38 percent in January, the lowest recorded for the month in the series dating back to 1994. It was also below the median 0.42 percent forecast from 48 analysts surveyed by Bloomberg. Consumer prices rose 5.35 percent in the 12 months through January, the least since September 2012 and half the level seen a year ago, the national statistics bureau reported Wednesday.

Latin America’s largest economy remains mired in recession, and until October the central bank had held borrowing costs at their highest in more than a decade. With inflation slowing quickly, policy makers found room to triple the pace of easing last month, in part to help boost the flagging economy. Inflation expectations kept falling after that.

The data allows the central bank to cut the benchmark Selic for longer, said Andre Perfeito, chief economist at Gradual Cctvm. He estimated the rate will fall to 9 percent by year-end, versus his previous 9.75 percent forecast. “I’m changing my call. Inflation is really falling fast.”

The central bank reduced the Selic to 13 percent in January, following two quarter-point cuts last year and one 75 basis-point cut last month. Economists surveyed by the bank last week expected the rate to drop to 9.5 percent by year-end.

Swap rates on the contract maturing in January 2018, which indicate expectations for the Selic at the end of 2017, fell 4 basis points to 10.74 percent by midday. The market is ascribing a 20 percent chance of policy makers stepping up the pace of easing to a full percentage point later this month, UBS economists wrote in a note to clients.

Economists surveyed by the central bank have successively cut their outlook for year-end inflation, most recently to 4.64 percent. That’s nearly at the 4.5 percent target, and the top five ranked economists already forecast inflation below that level. Garde’s Weeks said economists will lower their 2017 forecast on the back of today’s data, and the next print could bring their median forecast below target.

‘Benign Composition’

In January, food and beverage prices rose 0.35 percent after a 0.08 percent uptick the prior month. The combination of that component with the cost of transport, which jumped 0.77 percent due to higher bus fares, accounted for more than half the increase in consumer prices in January. On the other hand, services inflation decelerated to 0.37 percent from 0.65 percent previously, according to calculations by Ibiuna Investimentos.

“More than the full IPCA index, which was very low by January standards, the composition of the data was also very benign,” said Daniel Weeks, an economist at Garde Investimentos. “The central bank could cut the Selic to 9 percent by year-end. And the bias for the rate is to the downside.”

--With assistance from Rafael Mendes and Danielle Chaves To contact the reporters on this story: David Biller in Rio de Janeiro at dbiller1@bloomberg.net, Josue Leonel in Sao Paulo at jleonel@bloomberg.net. To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Walter Brandimarte, Robert Jameson