Brazil inflation hits new 18-year low, below all forecasts

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SAO PAULO (Reuters) - Brazilian inflation hit a fresh 18-year low in August due to an abundant harvest, undershooting all estimates and giving plenty of room for the central bank to keep cutting interest rates.

The IPCA consumer price index rose 2.46 percent in the 12 months through August, statistics agency IBGE said on Wednesday. The annual inflation rate came in below even the lowest forecast in a Reuters survey of 23 economists.

The reading suggests that recent improvement in the labor market and consumer spending have yet to generate substantial price pressures, a welcome development as Latin America’s largest economy emerges from its deepest recession in a century.

Inflation slowed in sectors closely tied to the pace of economic activity, such as healthcare, education and discretionary consumer spending.

Consumer prices rose 0.19 percent from July, slowing from the 0.24 percent rate seen in the previous month.

Economists had expected the monthly inflation rate to accelerate to 0.31 percent, due to a mid-July tax hike on fuel prices as well as higher electricity rates. The surprising data may indicate that the impact of those one-off items is fading.

The 12-month inflation rate has fallen well below the bottom end of the central bank’s target range of 4.5 percent plus or minus 1.5 percentage point for months, allowing the central bank to cut interest rates to the lowest levels since 2013.

Policymakers are widely expected to lower the benchmark Selic rate by a further 100 basis points later on Wednesday, extending the deepest easing cycle in a decade.

Yields paid on Brazilian interest rate futures <0#2DIJ:> fell in early Wednesday trading as traders bet that the central bank will hint it may maintain an aggressive pace of cuts in its October meeting.

Reporting by Bruno Federowski; Editing by Meredith Mazzilli