Rising inflation reduces Brazil’s room to cut interest rates

Inflation in Brazil rose again last month, fueling speculation that the central bank’s cycle of interest rate cuts may be coming to an end.

Inflation for the 12 months ending May 31, measured by the official IPCA consumer price index, reached 3.93%, compared with 3.69% for the period ending in April, according to the Bureau of IBGE statistics.

For the month of May alone, inflation was 0.46%, compared to 0.38% in April. The main increases come from the prices of food, housing and health.

Although the 12-month inflation figure remains in line with the central bank’s annual target (1.5-4.5%), the rising growth rate worries analysts.

“The trend is towards increasing inflation, mainly influenced by the government’s strategy of increasing spending and not adopting cost-cutting measures. Faced with this scenario, which is very clear, the central bank has no choice but to immediately stop the cycle of interest rate cuts,” Reginaldo Galhardo, director of local brokerage Treviso Corretora, told BNamericas.

The monetary authority began its current round of monetary easing in August last year, in the meantime lowering the Selic base rate from 13.75% to 10.50%, where it currently stands.

The central bank’s next interest rate decision is expected to be announced on June 19.

“The rise in inflation in Brazil to 3.9% year-on-year in May and, more importantly, the re-acceleration of underlying inflation in basic services, means that we no longer expect a decline in rates at the Copom (central bank rates committee) meeting next week,” William Jackson, chief emerging markets economist at Capital Economics, said in a report.

“With inflation expected to rise further, the labor market remaining strong and inflation expectations rising, it now appears more likely that the Selic rate will remain at 10.50% through the end of the year ” added Jackson, who previously expected an increase. 25 basis point reduction in interest rate next week.