Brazil Inflation Slows Past All Forecasts as Interest Rate Rises

Andrew Rosati
3-min read

(Bloomberg) -- Brazil’s annual inflation slowed much more than expected in early September despite a hike to utility bills, giving some respite to the central bank as it raises borrowing costs to tame prices.

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Official data released Wednesday showed prices rose 4.12% from a year earlier, below all forecasts in a Bloomberg survey of economists that had a 4.29% median estimate. On the month, they increased 0.13%.

Swap rates on the contract due in January 2026, an indicator of financial market sentiment toward monetary policy at the end of next year, fell as much as 17 basis points in morning trading after the inflation report.

Policymakers began lifting interest rates last week to cool down a hot economy and pull inflation levels down to the 3% target. Their efforts have been complicated by factors including a strong jobs market, a weak currency and the worst drought on record.

Brazil’s power regulator began applying additional charges to electricity bills at the start of September in response to a drop in reservoir levels at hydroelectric plants. Over half of the South American nation’s power supply comes from hydro, and higher energy costs are reverberating across the economy.

Housing costs rose 0.5%, lifted by a spike in energy prices, representing the principal inflation driver in the first half of September. Food and beverages also became more expensive, while transport costs dropped 0.08% on cheaper gasoline, the statistics agency said.

“Today’s numbers ease the pressure on the Copom to continue tightening,” Andres Abadia, Chief Latin America Economist at Pantheon Macroeconomics, wrote in a research note. “But upward risk to inflation will remain in the very near term.”

Bank Credibility

While the data signaled progress in the central bank’s battle against inflation, Brazil watchers cautioned central bankers are unlikely to declare victory anytime soon. Investors are uneasy about a change in leadership underway at the institution as well as higher public spending, causing swings in local assets.

Those pressures were among the reasons that led the central bank’s board, known as Copom, to lift the benchmark rate a quarter-point last week to 10.75%. Policymakers described the hike as a gradual start to the tightening cycle, but they have so far provided little detail on their path ahead.

Gabriel Galipolo, the central bank’s director of monetary policy and an ally of President Luiz Inacio Lula da Silva, is set replace current Governor Roberto Campos Neto, whose term ends in December.

Despite an anti-inflation stance from Galipolo, investors are fretting he may cave to political pressure from Lula, who has long clamored for lower interest rates to jolt growth.

Wednesday’s data is unlikely to “alter the mood at the central bank, with Copom members clearly keen to shore up their credibility amid concerns about politicization of the institution,” Jason Tuvey, Deputy Chief Emerging Markets Economist at Capital Economics, wrote in a research note.

--With assistance from Giovanna Serafim.

(Recasts lede, adds market reaction and inflation details starting in third paragraph)

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