Brazil’s rate-cutting cycle set to end as prices rise more than expected in May

By Thomson Reuters Jun 11, 2024 | 9:33 AM

By Gabriel Araujo

SAO PAULO (Reuters) – Consumer prices in Brazil accelerated more than expected in May, data from statistics agency IBGE showed on Tuesday, with a jump in food costs helping drive annual inflation further away from the central bank’s target.

The data put the monetary authority’s ongoing easing cycle at risk, economists say, with investors pricing in a pause in the rate-cutting process when policymakers meet again later this month.

Prices as measured by Brazil’s benchmark IPCA index rose 0.46% last month, above market forecast of 0.42%, according to a Reuters poll of economists, up from the 0.38% increase in April.

Meanwhile, 12-month inflation in Latin America’s largest economy hit 3.93%, up from 3.69% in the previous month and above the expected 3.89%.

Eight of the nine groups surveyed by IBGE expected price increases in May, with rising costs for food and beverages, as well as housing, having the greatest impact on the overall index.

The statistics agency noted that recent devastating floods in Rio Grande do Sul, a major farming state, contributed to the rise in food costs – especially the jump of more than 20% in potato prices.

“It was a poor quantitative and qualitative result overall, which will strengthen the central bank’s cautious stance,” lender Inter senior economist Alberto Valerio said, betting that interest rates will be kept on hold at the “next meetings”.

Policymakers at Brazil’s central bank have vowed to keep interest rates at a restrictive level long enough until inflation eases to the bank’s 3% target, which has a tolerance band of plus or minus 1.5 percentage points.

In May, the bank cut its benchmark rate by 25 basis points to 10.50% after six reductions twice that size. Board members have voiced concerns about rising inflation expectations for this year and the next.

Galapagos Capital’s chief economist, Tatiana Pinheiro, said the latest inflation figures pave the way for the bank to maintain borrowing costs unchanged at its next meeting, bringing an end to the easing cycle that started in August 2023.

She also said there was a possibility that board members would flag in the meeting minutes “a higher probability of a rise in interest rates, mainly due to the weakening of the Brazilian real.”

Brazil’s currency on Monday hit its lowest level in a year and a half against the U.S. dollar on fiscal worries and global uncertainties.

(Reporting by Gabriel Araujo; Editing by Chizu Nomiyama and Shinjini Ganguli)