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Fuel price induced
inflationary pressures dim prospects for further Central Bank easing
According to IBGE, consumer prices increased 0.6% in March, which was
double the monthly rate expected by the Consensus. The March figure
lifted annual inflation to 7.8%, from 7.5% in February. At its current
level, annual inflation is well above the 5.5% upper limit of the Central
Bank’s inflation target range for this year. The March consumer price
spike can be attributed to a surge in transportation costs, which
registered the strongest increase among the major price categories with a
1.04% variation over February. Transportation accounts for 21.4% of the
IPCA consumer price index and was thus responsible for the lion share of
the monthly increase. The March transportation reading was well above the
decline observed in February and was driven primarily by a 3.33% increase
in fuel costs (up from 2.16% in February). The Consensus has not yet
fully factored the March price surprise into this year’s inflation
forecast both because the data release in some cases came following
submittal of panellist projections and also since the persistence of the
current oil price spike is not necessarily a permanent adjustment in
inflation levels. A resolution in the current Middle East crisis could
easily prompt a sudden reversal of the upward trend in international oil
prices and thus ease inflationary pressures considerably. Participants
still expect the Central Bank to maintain inflation below the upper limit
of the current targeted range but the forecast rose
0.2 percentage points from last month’s forecast.
Interest rates unlikely to
drop amidst uncertain oil price setting
The March inflation surge has practically
eliminated any possibility of further easing in the Central Bank monetary
policy (COPOM) meeting scheduled for 16-17 April. Before the release of
the March figure some participants had expected a renewed 25 basis point
cut – following two 25 basis point cuts in February and March that lowered
the benchmark SELIC interest rate to 18.50% - but continued uncertainty
over oil prices are likely to have sidelined further easing for the time
being. Even so, participants expect interest rates to come down gradually
this year with the SELIC dropping
somewhat towards
the
end of
the
year.
Note:
The above text is an abridged version of the LatinFocus Consensus Forecast
briefing on Brazil. For more details please click here.
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