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Bets that Brazil may
hold interest rates at a record low throughout 2019 gained strength on
Friday after the country posted its biggest monthly deflation in one-and-a-half
Consumer prices measured by the benchmark IPCA index fell 0.21%
in November, three times as much as economists expected. Swap rates on
futures contracts, a barometer of expected interest-rate decisions, dove
following the data’s release. The most-traded contract, maturing in
January 2021, fell 13 basis points to 7.78% by midday.
“We expect the first rate hike in September, but today’s data put a
bias for a even later hike, perhaps just in 2020,”
Luciano Rostagno, chief strategist at
Banco Mizuho do Brasil, said in an email. Rostagno also lowered his
end-2018 inflation forecast to 3.7%, 80 basis points below the
government’s 4.5% target, from 3.8% previously.
Below-target inflation will be a feather in the cap for outgoing
central bank chief
Ilan Goldfajn, who took the monetary authority’s reins with consumer
prices racing ahead at a nearly double-digit pace. The slowdown has
permitted the government to lower its inflation target for 2019 and the
central bank to keep its benchmark rate at a record low of 6.5%.
As recent as a month ago, traders expected monetary tightening to
begin in March as inflation was slightly above target. Now, with the
economic recovery slow to gain traction, many are betting on a scenario
in which the Selic remains unchanged throughout 2019, according to
economists including Banco Fibra’s
Cristiano Oliveira, CM Capital Markets’ Camila Abdelmalack, and MZK
Investimentos’ Luiz Fernando Azevedo.
“The central bank sees rates as stimulative, but sometime in the
future it could see that 6.5% as neutral,” Azevedo said by phone.
In the 12 months through November, inflation slowed to 4.05%
from 4.56% the prior month, the national statistics agency
reported on Friday. Deflation in November was led by electricity prices,
which fell 4.04%, and their plunge was equal to three quarters of
the monthly reading. Fuel prices also fell 2.42%, helping bring
transport prices down 0.74%.
Tame price increases extended beyond specific components, however.
That was underscored by near-zero core inflation readings and a low
diffusion index, both of which are consistent with the economy’s ample
idle capacity that’s unlikely to change anytime soon, according to
“Policy-wise, we continue to see this development as supportive of a
stable Selic for at least most of 2019,” Dupita said. “If inflation
remains well-behaved, the timing for a hike may end up being later
rather than sooner.”
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