Brazilian consumer inflation began 2019 under significantly more pressure than in 2018, with prices rising 2.2 percent in the initial five months of the year, as compared with 1.3 percent in the same period last year, driven by increased food and energy prices. Nevertheless, short-term inflation dynamics began improving in June, mainly owing to the unwinding of those earlier pressures.
“Our preliminary forecast for July inflation is 0.20-0.25 percent m/m, which would leave annual IPCA at about 3.3 percent y/y. Increases in electricity bills in Sao Paulo and the reintroduction of a surcharge known as “bandeira tarifaria” should add some 15bp to the headline this month, while we see food deflation waning”, said Barclays in a research report.
As inflation is expected to continue to remain below the central bank’s targets for 2019 and 2020 in the next quarters, there appear to be space for a small easing cycle of 75 basis points in 2019.
“We continue to expect the easing cycle to be modest, bringing the Selic rate from 6.50 percent to 5.75 percent by Q4 19”, stated Barclays.
This view is based on the small space shown by the Brazilian Central Bank in its inflation forecasts in relation to the targets in the most recent Quarterly Inflation Report, and also takes into account the expectation for a gradual economic rebound to begin materializing in the second half of this year and the BRL to trade at 3.90 per USD by the end of 2019, added Barclays.
