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Pantheon Say Underlying Inflation Pressures Remain In Check

BRAZIL
  • Pantheon believe underlying pressures for Brazilian inflation are under control, despite the y/y rebound, which was due to unfavourable base effects. The monthly gain in September—below the average 0.4% gain for the month during the 2010s— was driven by price increases in six of the nine components, in particular transportation/fuel costs, due largely to Petrobras raising gasoline prices.
  • Looking ahead, Pantheon expect disinflation to resume over the coming months, as base effects normalise. They think that modest economic growth over the next three to six months, the still-ample output gap and the hit from elevated real interest rates will help to keep the headline rate under control.
  • Pantheon see inflation close to around 4.8% at the end of the year, but risks abound. Higher oil prices, widespread global jitters and still-lingering fiscal risks— putting the BRL under severe stress—are now key threats. The recent BRL sell-off is probably now on policymakers’ radar.
  • Pantheon’s base case is that the BRL will hover around 5.0-to-5.1 per USD over Q4 and in early Q1, thanks mainly to still-high rates and solid external accounts; but that’s far from guaranteed.

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