Brazil’s mid-May inflation likely decelerated, inflation may converge towards BCB’s target rate in 2017

Entire month IPCA inflation in Brazil decelerated in March to 9.39% y/y and in April to 9.28% y/y from February’s 10.36%. Housing inflation has decelerated at a significant rate at present and overall inflation moderation is expected to carry on throughout in 2016, said Societe Generale in a research report.

“We expect IPCA-15 series to show mid-May inflation decelerating to 9.15% yoy”, added Societe Generale.

The risks on the upside to the projections continue to be solid food prices and accelerating health and personal care inflation. But this risk is highly eased by the increasing slack in the labor and product market and the “strong base effect in the regulated price segment”, noted Societe Generale. Inflation expectations for the year ahead have declined 85bp since late February. This is partially due to the appreciation of the Brazilian real and partially because of the recent easing of inflation.

The worsening output gap and declining labor market have made sure that the second-degree impact of higher inflation in 2015 continues to be curbed slightly. There are downside risks that inflation might reach towards the central bank’s target rate of 4.5% in 2017 that might result in stronger-than-anticipated easing of monetary policy. Under such scenario that inflation might reach close to the mid-point of the central bank’s target range in 2017, policy easing might start in 2016, according to Societe Generale.