Brazil: Inflation conditions remain constructive for the central bank to cut rates  - Rabobank

According to analysts from Rabobank, the recent inflation data from Brazil, showed a broad-based CPI slowdown, on the back of huge slacks, anchored expectations, favourable inertia, easy FX (at least until March) and food deflation. 

Key Quotes: 

“We preliminarily project a 0.25% m/m headline IPCA gain for April, implying a slight gain in the annual reading to 2.8% y/y – still short of the BCB’s targeted zone (4.5% mid-target with leeway +/- 1.5 p.p.). For the full-year, our number is still 3.6% assuming hikes in (CIDE) fuel taxes generating a total impact of a 0.4 p.p.. Without the latter, our number would be 3.2%.”

“The data continue to evidence a broad-based CPI slowdown, on the back of huge slacks, anchored expectations, favourable inertia, easy FX (at least until recently), food deflation. “

“The weaker FX rate is merely reducing additional downside risks for inflation. As per the BCB’s forecasts, for instance, March IPCA came in 0.1 p.p. below the BCB’s figure. Thus, if the current USD/BRL level is kept until the end of year (i.e. 3.42), the FX weakness would generate an impact that would merely compensate for the downside surprise in today’s report.”

“The bottom-line message (as recently suggested by the monetary authority): the inflation scenario remains constructive enough for the Brazilian Central Bank (BCB) to keep its plan to cut rate in May. And the FX weakness seen so far does very little to change that outlook. At most, it reinforces the expectation of a pause in June, as indicated in the BCB’s communications.”