News & analysis

The release of Brazil’s June IPCA-15 data today drew some attention from traders and analysts as headline inflation measures cooled just a week after the Monetary Policy Committee (Copom) decided to downshift its easing cycle once again. After surprising at the May meeting with a 25 basis point cut, despite explicit guidance for a final 50 basis point cut, the BCB vote unanimously to keep the Selic rate at 10.50% for the first time this easing cycle.

Behind the decision, Copom pointed primarily to upward pressures on prices, with the latest monthly data showing that the disinflationary process was slowing down in the second quarter. With this, the Committee took a risky decision: to put the Bank’s inflation mandate ahead of the demands of Lula’s pro-growth administration, potentially bringing the two institutions into conflict again. Against this backdrop, and with the consensus pointing to a significant intensification of inflationary pressures between late May and early June to support the BCB’s recent hawkish turn, the data fell short. While this might sow some discord among “higher rates” advocates in Brazil, we believe it does not exactly provide a strong case for cutting at the next meeting either, especially given the unanimity of the decision to hold a week ago.

For this to change, we suspect that a noticeable re-acceleration of the disinflationary process would be needed before the summer break, which is not part of our baseline scenario or suggested by the progression of core services inflation.

The National Broad Consumer Price Index 15 (IPCA-15) stood at 0.39% month-on-month in June, marginally below expectations of 0.44% and below the year-to-date average of 0.42%. However, on a year-on-year basis, headline inflation accelerated to 4.06%, up from 3.70% in May, although again slightly below expectations of 4.11%. According to the disaggregated report, seven of the nine product and service groups surveyed increased in June. Among them, the Food and Beverages group registered the highest variation (0.98%) and the contribution (0.21pp) in the June HICP-15 on a monthly basis, followed by Housing (0.63% and 0.10pp) and Health and personal care (0.57% and 0.08pp) groups. Although the IBGE does not publish a specific reading of core services inflation, overall services inflation weakened considerably to 0.1% MoM, providing just 0.03pp to overall inflation. That said, we suspect most of this was derived by volatile components, such as transportation, seeing as overall core inflation remained elevated at 0.34% MoM at a time when industrial goods inflation remained weak. As such, we suspect the sequential pace of core services inflation remains elevated, justifying the BCB’s cautious approach.

While we believe that policymakers are likely to find some comfort in the recent data, June’s inflation report doesn’t necessarily contradict the BCB’s latest decision or its assessment that risks to their inflation forecasts remain tilted to the upside.

These same risks led Copom to revise up their baseline inflation scenario for a second consecutive time from 3.8% to 4.0% in 2024 and from 3.3% to 3.4% in 2025, levels that headline inflation continues to track above. Therefore, despite the data marginally undershooting expectations, risks to core inflation remain skewed to the upside. This should keep the BCB on hold over the summer. In the context of growing concerns over the sustainability of Brazil’s debt, higher BCB rates should maintain fears that Finance Minister Haddad will miss the primary fiscal target this year, leaving the BCB at risk of further political pressure to cut rates. In order to stabilise investor sentiment, we suspect this will further support the BCB’s more cautious approach as opposed to increasing the risk of a surprise cut.


María Marcos, FX Market Analyst


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