Brazil Inflation-Rate Retreat Bolsters Central Bank Credibility
--Brazil prices rise at softer pace in May, causing 12-month rate to drop under 5%
--Latest inflation, economic data support Brazilian Central Bank's latest moves
--Inflation converging on 2012 target, but some economists see troubles in 2013
By Jeff Fick
RIO DE JANEIRO--Brazil's inflation rate continued its steady retreat last month toward the government's target, as weak economic activity and global uncertainties slow price gains in Latin America's largest economy.
A dramatic decline in airfares and softer price increases for cigarettes and medicines offset advancing food prices, the Brazilian Institute of Geography and Statistics, or IBGE, said Wednesday. Consumer prices rose a lower-than-expected 0.36% in May, causing the widely watched rolling 12-month inflation rate to retreat to 4.99%--the first time the measure has been below 5% since September 2010.
The May inflation figure "is going to reinforce the central bank's confidence that inflation is retreating," said Flavio Serrano, an economist at Banco Espirito Santo.
While the Brazilian Central Bank has received a fair amount of criticism from economists for its decisions, the latest economic indicators suggest the bank largely has made the right calls. Brazil's inflation remains on a path toward convergence with the bank's 4.5% target, while much-maligned interest-rate cuts should help boost activity amid a local slowdown.
"The inflation curve seems to have finally started to bend down," said Goldman Sachs in a research report. The improved outlook for domestic inflation, weak economic growth and global uncertainties likely will mean more interest- rate cuts and stimulus measures, the firm said. Brazil's government may even resort to a surprise move to snap the country out of its malaise.
"If the economy fails to respond and the external backdrop deteriorates, we do not rule out the possibility that the government could formally announce a reduction in primary fiscal surplus target," Goldman Sachs said. Brazil currently is targeting a primary surplus of 3.1% of gross domestic product.
Brazil's GDP growth slowed to 0.8% year-on-year in the first quarter as the European debt crisis and the country's own struggling industrial sector weighed on growth. The gloomy scenario caused the central bank to shift its policy focus toward fomenting growth from concerns about inflation. Central bankers started an aggressive monetary-easing cycle in August 2011, when inflation was heading toward a 7.3% peak in September, that has culminated in a record-low 8.5% for the benchmark Selic base interest rate.
Finance Minister Guido Mantega confirmed that more interest-rate cuts and other measures to stimulate the economy are on the way, telling reporters in Brasilia that the latest figures give the government "a degree of liberty to have a more flexible monetary policy, or reduced interest rates and increased credit."
Over the next couple of months, seasonal factors likely will keep inflation stable at current levels and give the central bank ample room to maneuver.
"Inflation is going to oscillate between 4.9% and 5.1% over the next few months," said Mr. Serrano. "Inflation is typically very low at this time of year, so I don't see the [rolling 12-month rate] retreating much further."
Should the government decide to extend tax breaks on automotive sales that are set to expire Aug. 31, there's a chance inflation could end 2012 very close to the central bank's target, Mr. Serrano added. The official target is 4.5%, with a tolerance band of plus or minus two percentage points. The IPCA ended 2011 at 6.5%, the ceiling of the target range. "I think convergence is possible, but it will be temporary and not consistent," the economist said.
The trouble is that government measures aimed at stimulating Brazil's economy are focused on consumption, which is already robust, rather than on lifting flagging private-sector investments, Mr. Serrano said.
"We imagine that when economic growth returns to more vigorous levels, inflation will also return," Mr. Serrano said. BES currently expects inflation to come in at 6% in 2013.
"The worst is going to come next year," Mr. Serrano said.
Write to Jeff Fick at jeff.fick@dowjones.com |
