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Pantheon Say More Good News For Copom

BRAZIL
  • Pantheon have noted that Brazil’s inflation continues to edge lower, thanks to the effect of increased borrowing costs, softening domestic demand, the BRL’s rebound year-to-date, and favourable base effects. Falling raw material prices, additional cuts of gasoline prices by Petrobras, and subdued pressures at the pipeline level, are also helping to bring inflation down, offsetting upside drivers, including a relatively resilient labour market.
  • Annual CPI will level off in late Q3 and will edge marginally higher in Q4, to about 5%, but underlying conditions will remain favourable for the BCB to start cutting rates next month. The main threat to this relatively upbeat picture is potential supply constraints associated with El Niño, hitting food prices, but this is more of a story for early next year. The potential good news is that El Niño, historically, is associated with heavy rains in Brazil, helping to improve water levels at reservoirs, and, consequently, pushing electricity tariffs lower, partially offsetting the hit from rising food prices.
  • An array of factors, including still-ample output gap, improving fiscal conditions, easing political noise, and both the BCB and the government acting to re-anchor inflation expectations, have opened the door for the start of the monetary easing cycle from the COPOM in August.
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