Brazil's inflation no longer accelerating, but to remain uncomfortably high

While Brazil's inflation in market-determined categories rose early this year, the bulk of the acceleration in the overall IPCA was caused by adjustments to the regulated prices of petrol and energy to support the government's fiscal austerity initiatives and reduce price distortions. However, that phase is clearly over, as April IPCA full-month inflation rose to 8.17% yoy versus our expectation of 8.40% yoy. More importantly, the monthly change in prices fell to 0.71%, nearly a similar rate as in the same month last year. 

"This trend is expected to strengthen in May and the IPCA-15 series to moderate to 8.13% yoy from 8.22% yoy last month. Looking ahead, even after assuming that the price-adjustment process is over, the recent acceleration in inflation will ensure that the rate does not fall significantly below 8% in Q4 15. Analysts expect it to remain at current levels over the next couple of months. As a result, despite some downside risk to the recently raised forecast of 8.1% for 2015, inflation is likely to remain generally unsupportive of the economy. It is expected to moderate to 6.0% in 2016 as the base effect kicks in", sexpects Societe Generale. 

Given this scenario, analysts continue to expect the likely June 50bp rate hike to be the last in the current tightening cycle. Of course, this also assumes that there will be no second-order price acceleration due to wage pressure.

Finally, continued (and possibly renewed) pressure on the BRL remains the key medium-term upside risk to our inflation forecasts, particularly when the effects of administered price changes ebb. This is also the key near-term upside risk to the rate forecast.