MNI POLICY: Inflation Data To Ease Brazil Cenbank Wage Nerves

Details of February’s Brazilian inflation data, showing an easing of services inflation, are likely to strengthen the case of those on the central bank’s monetary policy committee (Copom) who argue that wage rises are not feeding inflationary pressures, MNI understands.

With recent debate within the Copom focusing on whether a previous worsening in services inflation was driven by wage increases, its deceleration to an annual 5.25% in February from 5.62% the month before will strengthen the arguments of members who had argued that more time was needed before deciding whether it was a factor affecting the broad direction of monetary policy.

At the Central Bank of Brazil’s next meeting on March 20 these members will now be able to point to how the biggest components driving services inflation in February were sectors such as education, which typically sees seasonal increases at the beginning of the year for reasons unrelated to the labor market.

In January, the BCB reduced its official rate by 50bp to 11.25% and indicated that more cuts of the same magnitude would come in the "next meetings," effectively committing policymakers to the current pace until at least the May decision. The discussion over services inflation is likely to be a key factor as the board decides whether to keep the plural “meetings” in its forward guidance. (See MNI INTERVIEW: BCB Likely To Keep Cuts Guidance -Schwartsman)

NO RED LIGHT

Governor Roberto Campos Neto said on March 4 that the upsurge in services inflation had not triggered any “red light” regarding the prospects that the overall consumer prices measure will converge to the Bank’s 3% target.

"We still believe that there is a benign convergence of inflation. We have conducted various analyses of inflation in services and understand that there is nothing that triggers a red light, but we are attentive," he said at the time. This optimistic view was reinforced by Deputy Governor Gabriel Galipolo, who told a public event that there was insufficient data to show that services inflation had been driven higher by wage pressures. (See MNI: Inflation Expectations Seen Key To Pace Of Brazil Easing)

But the most hawkish Bank deputy, Diogo Guillen, emphasized on Feb 23 that the board is looking "carefully" at recent data on wage increases for signs of inflationary pressure, particularly on services.