Rising inflation shrinks Brazil's room to reduce interest rates

Brazil's inflation climbed again last month, fueling speculation that the cycle of interest rate reductions by the central bank could come to an end.

Inflation for the 12 months ending on May 31, measured by the official IPCA consumer price index, rose to 3.93%, up from 3.69% for the period ending in April, according to statistics bureau IBGE. 

For May alone, inflation was 0.46%, compared with 0.38% in April. The main increases came from food, housing and health prices. 

Although the 12-month inflation figure remains in line with the central bank's target for the year (1.5-4.5%), the rising rate of growth is causing concern among analysts. 

"The tendency is for inflation to increase, mainly influenced by the government's strategy of expanding its spending and not adopting any cost-cutting measures. Given this scenario, which is very clear, the central bank has no option other than to immediately halt the cycle of reductions in the interest rate," Reginaldo Galhardo, manager of local brokerage Treviso Corretora, told BNamericas. 

The monetary authority began its current monetary easing cycle in August last year, cutting the Selic base rate over the intervening period from 13.75% to 10.50%, where it stands at present.

The next interest rate decision by the central bank is due to be announced on June 19.

"The rise in inflation in Brazil to 3.9% y/y in May and, more importantly, the re-acceleration in underlying core services inflation, means we no longer expect a rate cut at the [central bank rate committee] Copom meeting next week," William Jackson, chief emerging markets economist at Capital Economics, said in a report. 

"Given that inflation is set to rise further, the labor market remains strong and that inflation expectations are rising, it now looks most likely that the Selic rate will remain at 10.50% until year-end," added Jackson, who was previously expecting a 25-basis point reduction in the interest rate next week.