Brazil's annual inflation rate tumbled more than expected in May to its lowest in 10 years, data showed on Friday, underscoring bets on a lower inflation target and new interest rate cuts that could bolster a feeble economic recovery. Consumer prices as measured by the benchmark IPCA index rose 3.60 percent in the 12 months through May, down from an increase of 4.08 percent in the previous month and below all forecasts in a Reuters poll, statistics agency IBGE said.
This is the lowest inflation rate for Brazil since May 2007, in stark contrast with the double-digit rates seen before a deep, two-year-long recession weighed on prices. Yields on rate futures were mostly down as lower-than-expected inflation could convince the central bank to continue cutting interest rates aggressively instead of slowing down the pace of easing as it signaled last week.
The central bank, which has lowered the benchmark Selic rate by 400 basis points since October, had been reiterating that rising market uncertainty in the wake of a scandal implicating President Michel Temer would probably make a smaller cut more appropriate. Economists forecast interest rates would fall from the current 10.25 percent to around 8.5 percent by December, according to a weekly survey. Lower rates should help the economy grow by 0.5 percent this year, after shrinking by more than 3 percent in each of the past two years, according to the survey.
Lower inflation also paves the way for the first cut in the official inflation target in more than a decade. Most economists expect the government to reduce the goal from the current 4.5 percent later this month to bring it closer to the target of other emerging economies. On a monthly basis, inflation rose to 0.31 percent in May from April, up from an increase of 0.14 percent in the previous month, according to IBGE. It was the lowest monthly rate for May since 2007.
Brazil could even see deflation in the monthly IPCA index in June, mainly because of a drop in electricity tariffs, according to economists with S?o Paulo-based consultancy MCM. That could send the annual inflation rate down to 3.2 percent, they said.