Brazil inflation slows more than expected, bolstering rate cut bets

• Brazil's annual inflation slowed to 4.22% in August, down from 4.44% in July.
• Consumer prices fell 0.32% in August from the previous month, the steepest monthly decline since August 2022.
• Housing costs led the monthly decline, falling 1.87% due to lower electricity bills.
• Transport prices dropped 0.86%, influenced by lower airfares and fuel costs.
• The central bank is expected to deliver another 25-basis-point interest rate cut at its next meeting, potentially lowering the Selic rate to 13.75%.

Brazil's annual inflation slowed more than expected in August, with consumer prices experiencing their steepest monthly decline in four years. The IPCA consumer price index rose 4.22% in the 12 months through August, easing from 4.44% in July and falling below the 4.27% forecast by economists. Consumer prices decreased by 0.32% in August compared to the previous month, exceeding market expectations of a 0.29% drop and marking the lowest monthly reading since August 2022.

The inflation rate remains within the central bank's target range of 3% plus or minus 1.5 percentage points. Policymakers are scheduled to decide on interest rates next week, following four consecutive 25-basis-point cuts that brought the benchmark Selic rate to 14%. Brazil's real interest rates are currently among the highest globally.

Liam Peach, senior emerging markets economist at Capital Economics, noted that the recent soft inflation figures, combined with weakening economic momentum, support another interest rate cut. He anticipates the rate could move from 14.00% to 13.75%.

Housing costs were the primary driver of the monthly decline, falling 1.87% due to a one-off discount on electricity bills linked to the Itaipu hydroelectric dam's performance. Transport prices also decreased by 0.86%, attributed to lower airfares and fuel costs, while food and beverage prices saw a 0.34% reduction. Communication costs also edged lower.

Andres Abadia, Chief Latin America Economist at Pantheon Macroeconomics, stated that the August report supports another 25-basis-point rate cut but does not indicate a faster pace of easing. He pointed out that while headline inflation decreased and some underlying pressures softened, the monthly weakness was largely due to temporary drops in electricity and fresh food prices.