Brazil sees signs of inflation pressure easing

Brazilian inflation came in below expectations in June, easing the pressure on the central bank regarding the next interest rate decisions.

Inflation, as measured by the IPCA, was 0.21% last month compared with 0.46% in May, while the 12-month figure was 4.23% versus 3.93% through May, according to statistics bureau IBGE.

"The inflation rate in June was below the expected rate, which was an acceleration of 0.32% and this removes the possibility of the central bank having to increase interest rates in the short term. However, the scenario for this year still does not leave room for the resumption of a monetary easing cycle," Luciano Rostagno, chief strategist at EPS Investimentos, told BNamericas.

Rostagno expects the Selic policy rate will remain at the current 10.5% at least until the end of this year.

In June, the monetary authority kept the Selic unchanged amid inflation concerns and ended a monetary easing cycle that began last August when the rate was 13.75%.

At the time, analysts and investors saw the possibility of an increase in the base rate this year in the face of worsening government finances due to the continued increase in spending. 

However, recently the government acted to control such expectations, announcing measures to cut budget expenses starting next year.

"After quite turbulent moments, we are in a period of lower pressure both due to the announcement of government spending cuts and also now due to the lower inflation indicator, but there is still no room for a reduction in the Selic rate because now the central bank's monetary policy is looking at next year's inflation," said Rostagno.

The four-year mandate of central bank governor Roberto Campos Neto, who was appointed by Jair Bolsonaro, President Luiz Inácio Lula da Silva’s predecessor, ends in December.

Lula will be able to name his successor and has indicated that his choice will be the bank's policy director, Gabriel Galípolo.

POSITIVE NEWS FOR LULA

Along with the inflation figure, Lula is celebrating this week other positive news as the approval ratings of his administration are rising.

A survey of 2,000 people by Quaest/Genial on July 5-8 showed that 54% of respondents approved of Lula's administration while 43% disapproved. 

The previous poll, released in May, showed the approval level at 50% and disapproval at 47%.