October 3, 2017 / 6:16 PM / 2 years ago

Brazil inflation likely grinds to near halt in September

SAO PAULO (Reuters) - Brazilian inflation likely slowed to a near halt in September, a Reuters poll of economists showed on Tuesday, further bolstering bets that the government will undershoot its target range in 2017 for the first time ever.

A man walks past a snacks store in downtown Sao Paulo, Brazil, September 27, 2017. REUTERS/Paulo Whitaker

Consumer prices as measured by the IPCA index probably rose 0.09 percent from August, according to the median of 32 forecasts in the poll, down from a 0.19 percent increase the month before. BRIPCA=ECI

Economists seem more confident about a sharp slowdown in inflation now that seven of the last eight bi-weekly inflation readings have come in below their forecasts. Estimates this time ranged between 0.03 percent and 0.15 percent, a much narrower gap than usual.

The index likely rose 2.47 percent from the year before, barely changed from August’s 2.46 percent increase, the poll showed. The data will be released on Friday at 9 a.m. local time (1200 GMT).

A surprisingly strong decline in food prices, due to a record agricultural harvest, has contributed to driving inflation from double digits in early 2016 to a 19-year low.

Signs that the Brazilian economy is picking up steam after emerging from its worst recession in a century have yet to generate substantial price pressures. Off-the-books jobs accounted for most employment gains, while companies are still struggling to fill idle capacity.

“Despite the economic recovery being on track, there is still a lot of spare capacity in the economy,” UBS economists wrote in a report.

An unexpected source of downward pressure on the September inflation figures came from electricity prices, which saw some relief as rains boosted hydroelectric power generation. Regulators hiked power rates in October and are expected to keep them high in coming months as the weather has once again turned dry.

Still, it may not be enough to lift inflation back to the government’s target range of 4.5 percent, plus or minus 1.5 percentage points, by year-end. The central bank has missed its inflation target three times in the last two decades, but has never undershot it.

That could prompt the central bank to cut interest rates below 7 percent by year-end, providing additional support to Latin America’s largest economy, economists said.

Interest-rate future markets currently indicate most traders expect the benchmark Selic rate to fall as low as 7 percent, an all-time low, but bets on an even sharper decline have been growing.

Central bank chief Ilan Goldfajn said on Monday the bank expects to cut rates at a moderate pace if current conditions hold.

Reporting by Bruno Federowski; Editing by Frances Kerry

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