Disinflationary trends quicken – a sign the central bank could deepen rate cuts

Brazilian economic round up from March 20-24

CentralBank
The Central Bank of Brazil may cut rates as disinflation gathers pace

The March inflation print (measured by the IPCA-15) came in at 0.15% and signalling intense disinflation and deeper cuts from the Central Bank of up to 100 basis points at the next meeting of the Monetary Policy Committee (known locally as the Copom). Since 2016, virtually all core measures show rapid and widespread disinflation since the fourth quarter of 2016. The core measure – which excludes food and administered prices – using the March IPCA-15 as a proxy for the result of during the month, recorded a rise of 4.6% in the annual comparison. Airline tickets pulled data down and, when excluding the item from core inflation measures, the increase was 0.25%, on the same basis of comparison. The core measure of underlying service inflation in the 12-month measure reached 5.08% and, at the seasonally adjusted margin, was 0.15%. When using the average of the last three months of the annualised measure the increase in inflation is only 2.7%. The probability of increased monetary easing remains high, paving the way for the increase of rate cuts to 100 bps at the next Copom meeting.

Brazil inflation
The downward path of Brazilian inflation

The revenue and expenditure report for the first two months of the year confirmed the need to find new sources of revenue to meet the 2017 fiscal target of a deficit of R$ 139 billion. The revision of economic growth – from 1.6% to 0.5% – led the government to announce a shortfall of R$ 58.1 billion in the federal budget, of which R$ 54.7 billion came from a fall in the estimate of net revenue and R$ 3.4 billion from an increase in compulsory expenses. Due to the shortfall, an equivalent reduction was announced in the contingency budget of R$ 58.1 billion. This is a cut of around one third to discretionary spending, which will be difficult to achieve. Therefore, given the problems the government will face in implementing adjustments due to a tight budget, they should announce additional measures for raising funds, with a likelihood of tax increases.

Mirelles

“I am not going to say [to get out of this, tax increases] are inevitable, but they are unavoidable, if we don’t want to run the risk of paralyzing essential things in the country – and we don’t even have this possibility – any tax increases will be temporary.” Minister of Finance, Henrique Meirelles.

The February current account deficit was at $ 0.9 billion confirming a more favourable situation. In the 12-month measure, the result was $ 22.9 billion, with the seasonally adjusted and annualised result recording a deficit of $ 12.5 billion at the margin. In February, the service account deficit was $2.4 billion, with a deficit of $ 0.8 billion in international travel and $ 1.3 billion in equipment rental. For the income account (-$ 3 billion) the highlight was the outflow of $ 2.1 billion of direct investment and $ 0.9 billion in portfolio investments. The trade surplus continues to be a positive highlight, recording a surplus of $ 4.4 billion in the period. In the financial account, foreign direct investment remained robust with inflows of $ 5.3 billion, while the rollover rate was 57%. In sum, the balance of payments continues to show a very satisfactory picture for external financing and should mean a stable exchange rate for the year.

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