Food Surprise Slows Brazil Inflation More Than All Forecasts

(Bloomberg) -- Brazil’s inflation decelerated more than all analysts forecast in the month through mid-September, fueling bets that the central bank will begin easing monetary policy next month.

Inflation as measured by the IPCA-15 index slowed to 0.23 percent after a 0.45 percent increase a month earlier, the national statistics agency said Thursday. That compares with the median estimate from 40 analysts surveyed by Bloomberg for a 0.33 percent increase in consumer prices, and whose lowest forecast was 0.25 percent. Twelve-month inflation decelerated to 8.78 percent, its slowest pace since May 2015.

Brazil’s central bank is on the cusp of reducing rates for the first time in almost four years; all that remains to be decided is when. While the worst two-year recession on record is putting pressure on policy makers to stimulate activity, inflation is still nearly double the 4.5 percent target that the board aims to hit next year. Traders are betting inflation will slow enough for the monetary authority to begin lowering the Selic starting at their October meeting, even as economists haven’t yet been convinced.

“This is the first piece of good news we’ve had on inflation for a few months now,” Neil Shearing, chief emerging markets economist at Capital Economics, said by phone from New York. “If this gets repeated in the full-month data for September, then a rate cut in the October monetary policy meeting could be back on the table. I still think they’re going to hold off.”

Swap rates on the contract due in January 2018 fell 12 basis points to 12.24 percent at 9:50 a.m. local time, with the yield curve reflecting a 25 basis point cut in the benchmark rate in October, according to data compiled by Bloomberg. The real gained 0.5 percent to 3.1897 per U.S. dollar. Brazil’s Finance Minister Henrique Meirelles told Bloomberg on Wednesday that it’s “highly probable” the benchmark interest rate will fall by year-end, which would be the first easing of monetary policy since October 2012.

Traders were particularly relieved by a decline in food prices, which had hindered an expected decline in inflation earlier this year. Prices for food and beverages fell 0.01 percent in the month, from a 0.78 percent gain in the month through mid-August, and marking its first negative reading in a year, the statistics agency said. Transport prices also fell, by 0.1 percent, due to declines in the prices of gasoline and flights.

Economists have been more cautious. Their median forecast for the Selic in October remains at its current level of 14.25 percent, and their forecast for inflation next year is virtually unchanged at 5.12 percent since the start of August, according to the bank’s weekly Focus survey.

That may be on the verge of reversal. Given the combination of more space for disinflation in food prices, the prospect for lower fuel prices in the future, and Meirelles’ recent comments, investment advisory firm Infinity Asset Management could move to October from November its call for the beginning of the easing cycle, chief economist Jason Vieira wrote in a note.

--With assistance from Rafael Mendes To contact the reporter on this story: David Biller in Rio de Janeiro at dbiller1@bloomberg.net. To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Walter Brandimarte, Robert Jameson