Brazil: Underlying inflation flashes green lights for rate cuts – Rabobank


Rabobank analysts points out that the IPCA, which is Brazil’s official inflation index has edged up by 0.01% m/m in June, a tad above consensus (-0.02%), but in line with the BCB’s projection published weeks ago (0.01%).

Key Quotes

“With some help from one-off base effects (e.g. truckers strike in 2018), the annual IPCA reading plunged to a one-year low of 3.4% (previous: 4.7%), way below the BCB’s mid-target for this and next year (4.25% and 4.00%, respectively).”

“In addition to the slowing headline, underlying inflation trends remain at comfortable (and below-target) levels. The average of the main core inflation gauges stands at 3.2% y/y and 3.4% q/q-saar. These figures show that (proxies for) demand-led inflation sit at the low end of the BCB’s target zone.”

“In the details, diffusion indexes for the IPCA also send encouraging signals for monetary policymakers.”

“All in all, the inflation outlook continues to warrant Selic rate cuts to another historical low of 5.0% by end-2019. We have been looking for three moves of 50bp starting in September, but an imminent passing of a robust pension reform at the Lower House this week increases the odds for a July move by the Copom.”

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