Tuesday, 10 February 2009

Brazil Inflation: Temporary Uptick in Prices Shouldn't Have Significant Impact on Rate-Cutting Programme

The IPCA index, Brazil's benchmark inflation measure, gained more than forecast by analysts in January, mainly driven by food prices. These rose on speculation that a drought affecting the country will trim supply for the coming months. We believe that is a seasonal trend. The increase in the monthly IPCA was 0.48 percent; the 12-month number slowed to 5.84 percent in January from 5.9 percent in December. What seems to be a consensus among market participants, which we share in MM, is that inflation will continue to decline rapidly along the first six to nine months of the year, driven by weaker consumption and declining import demand, opening space for monetary easing front-loading by the Banco Central do Brasil.

Yet, most analysts are forecasting the IPCA to accelerate. Inflation is likely to come in at around 0.6 percent ot 0.65 percent this month, because of another seasonal round of increases in school fees. Government-controlled rates may rise too, driven by higher public transport fares in key cities. On the other hand, food and entertainment costs may probably help bring down inflationary pressure. In general, the markets are expecting a decline of 75 basis points to 100 basis points in the Selic for March. I am much more on the side of tose who expect a larger cut -- because of the markedly economic deceleration that we witnessed in the past month.

Now, read what Banco Itau economists are predicting for the Selic in the next monetary policy meeting. This comes courtesy of a source:

"We now expect the central bank to step up to a 150 basis-point cut on Mar 11, bringing the Selic to 11.25 percent. In our view, frontloading the cycle, rather than
smoothing it out, is the right response to fragile growth, falling inflation risk, and broken confidence. We still favour a total easing of 300 points, but the risk is rising that the centrak bank will go deeper than that.´´

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