Brazil’s annual inflation rate fell below 5 per cent for the first time since late 2010, a shot of good news for the government’s efforts to stem a slowdown in Latin America’s largest economy.
While other emerging market economies such as India are struggling with high inflation and low growth, Brazil’s 4.99 per cent May inflation reading suggests the central bank’s strategy of simultaneously reducing interest rates and prices is working.
“As long as inflation continues to fall that means policy makers can continue to focus on the growth problems,” said Neil Shearing, economist with Capital Economics in London.
Alexandre Tombini, governor of the Banco Central do Brasil, has cut interest rates rapidly over the past 10 months, from 12.5 per cent to a record low of 8.5 per cent late last month.
The central bank has argued that weakening global economic conditions justified the rapid cuts and that these would not jeopardize efforts to reduce inflation back to the centre of the official target of 4.5 per cent plus or minus 2 percentage points.
The government of President Dilma Rousseff wants to use the international financial crisis as an opportunity to permanently lower Brazil’s real interest rates, which are among the highest in the world.
The IPCA index, Brazil’s benchmark inflation indicator, rose 0.36 per cent in May compared with a 0.64 per cent rise in April, beating the market consensus for an increase of about 0.42 per cent.
The fall was driven by declines in the prices of healthcare, personal expenses, communications, air tickets, cars and ethanol.
“We were already expecting lower cigarette and housekeeping price pressures to lead the personal spending group down but we were surprised with the magnitude of the movement,” Barclays said in a client note.
Economists cautioned, however, that while falling inflation was good news, there were concerns that weak growth in the first half of this year could encourage the government to overdo stimulus measures.
The government is already cutting taxes on strategic industries, indirectly increasing taxes on imports and stimulating the economy through monetary policy.
Brazil’s economic growth faltered to just 0.2 per cent in the first quarter compared with the fourth quarter and economists now predict the country will grow at 2.7 per cent this year, on par with last year but short of long-term trends of 4 per cent and above. Some analysts are forecasting annual growth of as low as 2 per cent.
“Although we expect seasonal factors to continue pushing inflation down in the coming months - the lowest [number] will be in July - on a year-on-year basis the ICPA should stabilise around the 5 per cent level for the rest of the year,” Barclays said.