Brazilian inflation likely to continue to moderate, albeit at slower pace

Brazilian inflation is expected to continue to decelerate, albeit at a slower rate than anticipated a month earlier. The mid-month IPCA-15 series indicated that June’s marginally lower food inflation was possibly not an indicator of things to come. Therefore, it is quite soon to project a sharp slowdown in inflation in Brazil in the next 12 months despite the continued growth and subdued labor market and the appreciation of the Brazilian real, noted Societe Generale in a research report.

“Surprisingly, higher food inflation prospects have prompted us to raise our average and 4Q16 inflation forecasts to 8.9 percent and 7.8 percent from 8.6 percent and 7.2 percent, respectively. We have also raised our 2017 average inflation forecast by 0.2pp to 6.6 percent”, added Societe Generale.

In the revised estimates, inflation is barely reaching the Central Bank of Brazil’s target ceiling of 6 percent for 2017. Overall, Brazilian inflation is likely to keep moderating in the near to medium term, albeit slowly.

Meanwhile, the minutes and statement of the first Copom meeting under the central bank’s new president Ilan Goldfajn implies that the central bank would adopt a wait-and-see approach unless it has additional and better clarity on the current inflation moderation and fiscal progress, according to Societe Generale.

Given the backdrop of mid-July inflation figures and after the Copom minutes, the central bank is expected to lower rate just one time by 25 basis points in the final Copom of 2016.

“In our revised estimates, we expect a year-end Selic rate at 14.00 percent although we keep our forecast of 150bp rate cuts in 2017”, said Societe Generale.

The Brazilian economy is expected to be in recession for most of the following 12 months and it would require all the assistance on monetary side.