Brazil Inflation Falls Below Target; Futures Plunge

Brazil’s consumer prices unexpectedly fell for a second straight month, pushing the annual inflation rate below the government’s target for the first time since January. Interest rate futures plunged.

Consumer prices as measured by the IPCA-15 index fell 0.05 percent in the month through mid-August, the national statistics agency said today. Economists had expected an increase of 0.06 percent, according to the median of 34 estimates in a survey of economists conducted by Bloomberg.

Today’s report reinforces the view that the central bank will keep the benchmark interest rate at 10.75 percent in September, and reduces the chance that policy makers will raise the Selic after October presidential elections, or in early 2011, said Zeina Latif, senior economist at RBS Securities Inc.

“Markets are already pricing in the pause in September,” Latif said in a phone interview in Sao Paulo. “This result today tends to scale down medium-term forecasts for the Selic.”

The 12-month inflation rate fell below the government’s 4.5 percent target to 4.44 percent. A 0.68 percent decline in food prices, after a 0.8 percent decline last month, accounted for the bulk of deflation.

The yield on the interest rate future contract due in January 2012 fell 0.11 percentage points, or 11 basis points, to 11.11 percent at 8:54 a.m. New York time. The contract has declined 36 basis points from 11.47 percent on Aug. 13.

Futures trades show investors expect policy makers to keep the Selic unchanged in September, according to data compiled by Bloomberg. Traders cut bets on rate increases after central bank President Henrique Meirelles said Aug. 16 that inflation expectations are “around” the central bank’s 2011 target, fueling speculation policy makers will pause.

Policy makers raised the overnight rates by a half-point to 10.75 percent in July, surprising 48 of 51 analysts surveyed by Bloomberg who had expected a third straight 0.75-point increase.

Inflation expectations for the next 12 months fell to 4.98 percent, from 5 percent a week earlier, according to a central bank survey of about 100 economists published Aug. 16.

Economists also cut their 2010 growth forecast to 7.09 percent, from 7.12 percent a week earlier, the survey found.

The real weakened 0.4 percent to 1.7623 per dollar at 9:02 a.m. New York time from 1.7555 yesterday and has declined 1 percent against the dollar this year.