February 8, 2018 / 12:07 PM / a year ago

UPDATE 1-Power rates drag Brazil Jan inflation sharply below forecasts

 (Recasts throughout to add details, context, market reaction)
    By Bruno Federowski
    BRASILIA, Feb 8 (Reuters) - Lower power tariffs pulled
Brazil's inflation rate below the official target range and even
the lowest of forecasts in January, casting doubts over the
central bank's plan to halt interest rate cuts.
    Consumer prices tracked by the benchmark IPCA index rose
2.86 percent in the twelve months through January, government
statistics agency IBGE said on Thursday.              
    Forecasts compiled by Reuters had ranged between 2.96
percent and 3.08 percent, with a 2.98 percent median. 
    The report is likely to cast a shadow on a widely-held
perception that inflation was trending upwards after a
months-long stretch of falling food prices came to an end.
    Annual inflation had reached 3.02 percent in mid-January,
within the central bank's target range of 4.5 percent, plus or
minus 1.5 percentage points.             
    The IPCA rose 0.29 percent in January from December, below
the median estimate of 0.41 percent in the Reuters poll.
    Lower power tariffs subtracted 0.17 percentage points from
the monthly reading after heavy rains boosted hydro generation
and allowed regulators to cut electricity rates in January and
    Last month, Brazil's energy minister said rates should
remain low in March too.
    The report supported trader bets on a March interest rate
cut even after the central bank stated on Wednesday that, at
that point, it considered appropriate to end the deepest easing
cycle in a decade.             
    The bank has reduced the benchmark Selic rate by 750 basis
points since October 2016 to an all-time low of 6.75 percent. 
    Yields paid on interest-rate futures           fell in the
wake of the inflation reading and implied a one-fourth
likelihood of a 25 basis-point reduction in March, though most
traders still bet the bank would stand pat.
    Policymakers have repeatedly stressed they would not
overreact to price shocks over which they have no control, but
have also highlighted the risk that slow inflation contaminates
expectations going forward.
    Expectations for year-end inflation remain stubbornly below
the midpoint of the central bank's target range, at 3.94 percent
according to the latest central bank survey of economists. 
    Meanwhile, wider price pressures remain muted amid
double-digit unemployment rates and wide idle capacity among
companies, even as the economy looked set to grow at the fastest
pace in five years in 2018.
Below is the result for each price category: 
                              January      December  
- Food and beverages          0.74         0.54     
- Housing                    -0.85        -0.40      
- Household articles          0.14         0.03     
- Apparel                    -0.98         0.84     
- Transport                   1.10         1.23     
- Health and personal care    0.42         0.40     
- Personal expenses           0.22         0.42     
- Education                   0.22         0.15     
- Communication               0.11        -0.11     
- IPCA                        0.29         0.44     

 (Reporting by Bruno Federowski; Editing by Nick Zieminski)
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