(Bloomberg) — Brazil’s annual inflation rose less than expected in June, helping to bolster the central bank’s momentum after it came under criticism for pausing interest-rate cuts to counter simmering price pressures.
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Official data released on Wednesday showed prices rose 4.23% from a year earlier, below the 4.32% median forecast of analysts surveyed by Bloomberg. Monthly inflation rose 0.21%, below all expectations.
Swap rates for contracts due in January 2026, a gauge of market sentiment towards monetary policy at the end of next year, fell 16 basis points in morning trading following the announcement of the lower-than-expected inflation rate.
“This is a pretty significant inflation report,” said Lais Carvalho, a Brazil economist at BNP Paribas. “It will give the central bank some relief.”
Policymakers last month ended a nearly year-long streak of rate cuts as the economy beat expectations and investors worried about President Luiz Inacio Lula da Silva's spending plans. The decision is likely to keep the key rate, Selic, at double digits for now to quell concerns that inflation will continue.
Bloomberg Economics' View
“Brazil's inflation came in weaker than expected in June, but we don't expect the central bank to change its plans to keep interest rates unchanged at 10.5%. The numbers may provide some relief and help temper expectations of rate hikes ahead of a possible acceleration in inflation in the coming months.”
— Adriana Dupita, Brazilian and Argentine economist
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Price growth remains well below a post-pandemic peak expected in 2022 but is currently being boosted by rising food prices and a weakening value of Brazil's real currency, leading economists to raise their inflation forecasts to even higher than the 3% target.
A 0.44 percent rise in food and beverage prices and a 0.54 percent increase in prices for personal care products led the rise in inflation in June, while lower air fares and some fuel prices helped transport costs fall 0.19 percent, the statistics bureau said.
There is every reason to be wary of inflation going forward: Brazil's currency has pared its losses recently but is still down nearly 10% this year, and state oil company Petroleo Brasileiro SA is raising gasoline prices for the first time in 11 months.
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The central bank is independent of the government and its caution has infuriated President Lula, who says borrowing costs are hurting growth and that Central Bank Governor Roberto Campos Neto is inflicting too much pain on the economy in his bid to hit inflation targets.
The criticism appears to have resonated with Brazil's public: A Quest poll released Wednesday showed Lula's approval rating rose to 54 percent, his highest this year, from 50 percent in July, while his disapproval rating fell to 43 percent from 47 percent.
The poll also found that 87 percent of respondents agreed with Lula that interest rates are too high, and two-thirds agreed with his criticism of the central bank. The poll, conducted July 5-8 among 2,000 people nationwide, has a margin of error of plus or minus 2 percentage points.
This institutional conflict has rattled domestic assets, with markets betting that the leftist president will try to exert more political pressure on the central bank when President Campos Neto's term ends later this year.
–With assistance from Giovanna Serafim, Beatriz Amat, and Gabriel Diniz Tavares.
(From paragraph 11 onwards, we add analysis of Lula's popularity and criticism of the central bank, as well as details of opinion polls.)
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