Falling Food Prices Slow Brazil Inflation to Two-Year Low

(Bloomberg) -- Brazil’s inflation slowed more than analysts forecast in the month through mid-October after the central bank cut the key interest rate for the first time in four years, kicking off what is expected to be a long cycle of monetary easing.

Inflation as measured by the IPCA-15 index decelerated to 0.19 percent, its slowest level since August 2014, after a 0.23 percent increase a month earlier, the national statistics agency said Friday. That compares with the median estimate from 48 analysts surveyed by Bloomberg for a 0.21 percent increase. Twelve-month inflation decelerated to 8.27 percent, its slowest pace since in more than a year.

“Inflation is really coming down, which is going to help anchor expectations for the coming month,” said Roberto Padovani, chief economist at Banco Votorantim SA. “I have a very positive reading of today’s inflation data."

Yet the central bank struck a cautious tone when cutting the rates this week, reducing the so-called Selic by half the amount many economists forecast, and saying that more aggressive cuts require greater confidence in the inflation trajectory. Market expectations have yet to mirror the central bank’s optimism that price increases will converge to the 4.5 percent target next year.

In a statement accompanying its Oct. 19 rate decision, the central bank’s monetary policy committee, known as Copom, said inflation had slowed more than expected “in part as a function of the reversal in the increase of food prices.”

While food and beverage prices fell 0.25 percent, its biggest drop since August 2014, services inflation accelerated to 0.46 percent from 0.43 percent in the prior reading, according to Padovani. On a 12-month basis, services inflation decelerated, he said. 

“There was little sign of the meaningful drop in services inflation that Copom members have begun to place more weight on in recent communications,” Neil Shearing, chief emerging markets economist at Capital Economics, wrote in a note to clients. “The upshot, then, is that there is enough here to persuade Copom to follow up this week’s 25-basis-point Selic rate cut with another 25 basis points.”

Swap rates on the contract due in January 2018 rose 4 basis points to 12.14 percent at 9:37 a.m. local time as the disappointment with services inflation raised doubts about whether the central bank will speed up the pace of monetary easing.

Uncertainty around the approval of fiscal adjustment measures and signs that disinflation might have paused for the IPCA components most sensitive to monetary policy are among the risks going forward, the central bank said in its statement. Inflation expectations are also still above the bank’s target. Economists surveyed by the central bank forecast the cost of living will rise 5.04 percent next year.