Skip to main content

The Globe and Mail

Brazil inflation rate falls below 5 per cent

Brazil's President Dilma Rousseff has blamed a monetary 'tsunami' of cheap money in Europe and the United States for making Brazil’s currency overvalued and causing its exports to become uncompetitive.


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.

Story continues below advertisement

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.

Story continues below advertisement

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.

Report an error

The Globe invites you to share your views. Please stay on topic and be respectful to everyone. For more information on our commenting policies and how our community-based moderation works, please read our Community Guidelines and our Terms and Conditions.

Please note that our commenting partner Civil Comments is closing down. As such we will be implementing a new commenting partner in the coming weeks. As of December 20th, 2017 we will be shutting down commenting on all article pages across our site while we do the maintenance and updates. We understand that commenting is important to our audience and hope to have a technical solution in place January 2018.

Discussion loading… ✨