Brazil’s inflation third monthly rise in June pours more cold water on interest rates cuts resumption

SAO PAULO (ICIS)–Brazil’s annual rate of inflation rose over the 4% mark in June as the Brazilian real depreciated and prices for food and health services rose strongly, the country’s statistics office IBGE said on Wednesday.

Brazil’s annual National Consumer Price Index (IPCA in its Portuguese acronym) rose in June to 4.23%, up from May’s 3.93%.

In May, inflation had already risen partly after severe flooding in Rio Grande do Sul caused generalized food price rises in the southernmost state.

Financial analysts had already warned in May than higher-than-expected price rises could prompt the central bank to halt interest rates cuts for the rest of 2024, hoping to contain the latest upticks in inflation.

On Wednesday, June further uptick prompted some of them to suggest there were growing chances there would not be any cuts to interest rates until 2026.

THREE MONTHS ON THE MARCH
As well as the increase in the annual rate of inflation to 4.23%, the IPCA also rose month on month, with monthly inflation at 0.21%, down from May’s 0.46%.

Prices for food consumed at home rose by 0.47% in June, compared with May, and prices for health service rose by 0.54%.

Transportation prices fell 0.19% in June, month on month, airfares posting the sharpest drop, down 9.88%. Fuel prices had mixed changes, with gasoline and ethanol prices rising, while diesel and vehicle gas prices fell.

Gray columns: forecast
Source: IBGE via Trading Economics

At the beginning of 2024, there were expectations that inflation would seasonally rise in the second half of the year, but the increases have materialized sooner and stronger than expected.

Petrochemicals-intensive manufacturing companies insist high interest rates continue to be a drag in their sales, as consumers shy away from big ticket purchases of durable goods, posting them until borrowing costs come down.

RATES AT 10.5% UNTIL 2026?
On Wednesday, financial analysts, most of whom were assuming the central bank would resume its monetary policy easing in early 2025 once the latest upticks in inflation had been contained, have now turned more pessimist.

UK-headquartered Capital Economics said it was “hard to see any scope” for cuts to the Selic, the main benchmark, in 2024 but added there was even a “growing risk” there will not be cuts in 2025 either.

In June, the central bank’s monetary policy committee (Copom) decided to keep the Selic unchanged at 10.5% after several cuts in a few months since August 2023, when it peaked at 13.75%.

SELIC Source: Banco Central do Brazil via Trading Economics

In June, investors’ weariness about President Luiz Inacio Lula da Silva intentions to increase public spending, potentially widening the fiscal deficit, spooked currency traders and the real (R) depreciating over the month.

It reached a low on 2 July at $1/R5.70, although it has recovered since to around $1/R5.41 on Wednesday afternoon.

The current fiscal deficit – and the prospect of it widening – was not helped by public spats, first, between members of Lula’s coalition cabinet nor by the President’s remarks criticizing the central bank and its president, quite outside the norm not to interfere with the institution’s independence.

In the end, Lula’s comments and his ministers’ public disagreements on fiscal targets may have caused the cabinet’s main wish – lowering rates to increase consumption and jobs in manufacturing – caused the exact opposite effect.

“The recent weakness in the real and mounting fiscal concerns means that there is no chance that Copom will restart its easing cycle at its meeting later this month. Rates are likely to be left unchanged throughout this year and there is a growing risk of no cuts next year either,” said analysts at Capital Economics.

“Of some comfort to Copom will be that the strength in core services inflation in May unwound … And more to the point, higher headline inflation will compound concerns at the central bank, particularly given the worsening fiscal position and recent fall in the real.”

REAL VERSUS DOLLAR

Source: Trading Economics 

Earlier in the week, before June inflation figures came out, economists surveyed by the central bank every week had already turned pessimistic as well about inflation falls slowing down and cuts being cut less than previously expected.

However, they do still expect cuts in 2025 – on average, they expect the Selic to close 2025 at 9.50%, although that was an increase from their expectations a month ago.

They now also expect inflation to end up higher both years – at 4.02% in 2024 and 3.88% in 2025. Expectations for GDP growth remain practically unchanged at 2.10% for 2024 and 1.97% for 2025.

Expectations for the dollar/real exchange rate also remain practically unchanged, with the economists surveyed by the central bank expecting the real to close 2024 and 2025 at $1/R5.20.

BRAZIL GDP
Quarter on quarter

Source: IBGE via Trading Economic 

Focus article by Jonathan Lopez