Brazil IPCA-15 (Mar. 2020) - Capital Economics
Latin America Economics

Brazil IPCA-15 (Mar. 2020)

Latin America Data Response
Written by Nikhil Sanghani
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The further fall in Brazilian inflation in the middle of March will allow the central bank to lower the Selic rate by a further 50bp in the near term. But the scope for aggressive easing is limited.

Weaker inflation gives scope for more Copom easing

  • The further fall in Brazilian inflation in the middle of March will allow the central bank to lower the Selic rate by a further 50bp in the near term. But the scope for aggressive easing is limited.
  • The March IPCA-15 inflation figure of 3.7% y/y was in line with both our own and the consensus forecast, and down from 4.2% y/y in February. Inflation now lies below the central bank’s 4% target. (See Chart 1.)
  • The breakdown showed that the decline earlier this month was driven mainly by falls in food and transport inflation. (See Table 1.) The former is likely to reflect the continued unwinding of the earlier spike in meat prices, while the latter is probably linked to the recent drop in oil prices.
  • In the coming months, lower oil prices will probably continue to push down inflation. We estimate that this will knock about 0.5-0.7%-pts off headline inflation. While that will be at least partly offset by the pass-through from a weaker currency (see here), inflation will probably remain below the central bank’s 4% target this year. As a result, Copom doesn’t have much to worry about on the inflation front.
  • The bigger concern for the central bank is the economic fallout from the coronavirus outbreak. Indeed, that informed its decision to cut the Selic rate by 50bp last week. Since then, Brazilian coronavirus cases have soared above 1,000 – the most in Latin America. While the government has so far shied away from measures to restrict the spread of the virus, domestic demand will still weaken considerably. Overall, we expect that GDP will contract by 1.5% in 2020 as a whole. (See here.)
  • Against that backdrop, we suspect that Copom will lower the Selic rate by a further 50bp, to 3.25%, at its meeting in May. But there is limited scope for a more aggressive response given the weak state of the public finances and the vulnerability of the currency to a further deterioration of investors’ risk appetite.

Chart 1: Brazil IPCA-15 (% y/y)

Source: IBGE

Table 1: Brazil IPCA-15

Headline

Food & Bev.

Housing

Pers. Exp.

Transp.

Health

Educ.

Clothing

% m/m

% y/y

% y/y

% y/y

% y/y

% y/y

% y/y

% y/y

% y/y

Dec-19

1.1

3.9

5.1

4.5

4.6

2.3

5.9

4.8

-2.1

Jan-20

0.7

4.3

6.1

4.2

4.6

3.7

5.5

4.7

-1.8

Feb-20

0.2

4.2

5.3

4.1

4.6

4.4

4.6

4.8

-1.7

Mar-20

0.0

3.7

4.3

3.5

4.4

3.0

5.1

5.1

-2.0

Source: IBGE


Nikhil Sanghani, Assistant Economist, nikhil.sanghani@capitaleconomics.com