Brazil observed the lowest annual inflation rate since September 2020 this June, as per figures provided by IBGE, Brazil's statistical bureau. This decline in consumer prices is leading experts to predict an imminent reduction in interest rates.
The figures for June, with annual inflation decelerating to 3.16% from May's 3.94%, mirrored the market prediction of 3.17%. Month-on-month, prices dropped by 0.08%, marking the first deflation since the previous September.
Following its dovish stance at the June meeting, indicating the possibility of a rate cut in August if the inflation trajectory remained positive, these figures are likely to endorse the central bank's leanings.
Capital Economics' chief emerging markets economist, William Jackson, opined, "Given the significant inflation decrease last month, it's highly probable that the central bank will initiate its easing cycle at the forthcoming meeting."
The Brazilian central bank has been running one of the globe's most forceful tightening cycles since early 2021, targeting elevated inflation and maintaining the Selic rate at a six-year high of 13.75% since August 2022.
Economists are now considering the potential magnitude of the anticipated rate reduction. Jackson from Capital proposed, "Our prediction stands at a 25-basis-point cut, bringing the Selic rate down to 13.50%, however, the probability of a more substantial 50-basis-point move is increasingly plausible."
Contrarily, Warren Rena's economist, Andrea Angelo, strongly advocates for a 25-basis-point cut, pointing to the most recent data on service inflation, a key indicator for the central bank's monetary policy committee (Copom), which underperformed expectations.
Following the release of the inflation data, the Bovespa, Brazil's leading stock index, dipped by 1.7%, while the Brazilian real depreciated 0.5% against the US dollar.
The primary drivers behind the 0.08% decline in consumer prices from May to June were reduced costs in food, beverages, and transportation. Although marginally lower than the 0.1% decrease anticipated by economists surveyed by Reuters, the deflation matched the central bank's own prediction in their quarterly inflation report from late June.
While the annual inflation currently aligns with this year's target range of 1.75%-4.75%, an increase is expected from July due to unfavorable base effects. However, central bank's private economists have continuously adjusted their inflation estimates downward for eight weeks straight, now forecasting a year-end inflation rate of 4.95% for 2023.
The Brazilian President, Luiz Inacio Lula da Silva, who has consistently advocated for rate cuts to boost economic growth, lauded the declining inflation trend. In a live social media broadcast, he hinted at the forthcoming interest rate cuts and referred to central bank governor Roberto Campos Neto as a "stubborn guy".
