Brazil Inflation Rate Eases

Brazil’s inflation rate eased much more than expected in November, putting a long-missed official target within reach this year and clearing the path for a more aggressive cycle of interest rate cuts by the central bank.

Consumer prices as measured by the benchmark IPCA index rose 6.99% in the 12 months through November, down from an increase of 7.87% in the previous month and below the market consensus for a 7.08% increase, government statistics agency IBGE said, Reuters reported.

The deceleration resulted in part from falling food prices and weaker-than-expected economic activity.

Prices rose 0.18% in November from October, below all 29 market forecasts in a Reuters poll. It was the lowest reading for November since 1998.

The government’s official inflation target is 4.5%, with a tolerance margin of plus or minus two per centage points.  Although the inflation rate remains high, the November surprise raises the possibility that it will hit the government’s target ceiling before 2017, something unthinkable to economists just a few months ago.

“There is a real chance that the IPCA will close this year within the official target range, given that the price increase in December 2015 was much higher than the current inflation pattern,” IBGE economist Eulina dos Santos said.

But Tendincias Consultoria economist Marcio Milan said a recent increase in fuel prices could keep inflation above the target for at least one more month.

Yields on interest rate futures fell as traders added bets that the central bank would cut its benchmark rate by 50 basis points to 13.25% at its next meeting in January. Economists see lower inflation and interest rates as crucial for Brazil to emerge from its worst recession in at least eight decades.

Brazil missed its inflation target by a wide margin last year, when the pace surpassed 10%. The central bank and market economists now expect it to fall to around 4.5% in 2017, allowing policymakers to cut interest rates to near 10% over the next year.

Meanwhile, the Brazilian government on Friday denied local media reports that President Michel Temer is willing to lower the minimum age of retirement of 65 years in his pension reform proposal.

Temer’s office said in a statement that the proposed minimum age was key in the reform and that the government, along with its allies in Congress, would do everything in its power to prevent any changes to the measure.

Temer has proposed setting a minimum retirement age and cutting benefits of what is considered one of the world’s most generous pension systems, which has become a heavy burden to the government’s coffers.