Brazil posts steepest deflation since 1998, sees more rate cuts

Brazil posted steepest monthly deflation since 1998 and it opened door to more rate cuts. Inflation in Brazil continued to evaporate in May, official figures showed on Thursday, as falling fuel and air travel costs due to the coronavirus crisis led to the steepest monthly fall in consumer prices since August 1998.

Consumer prices as measured by the IPCA index fell 0.38% in May, less than the 0.46% fall economists in a Reuters poll had expected but still the fastest monthly rate of deflation in 22 years and the second fastest since records began in 1980.

The annual inflation rate slowed to 1.9% from 2.4% in April, slightly above the Reuters poll forecast of 1.8%, but also the lowest annual rate of inflation since January 1999.

Annual inflation is well below the central bank’s official 2020 target of 4.0%, even allowing for the 1.5 percentage-point margin allowed on either side of that figure.

The latest evidence of weak price pressures is likely to set the seal on another interest rate cut from the central bank next week.

“The breakdown showed that the decline in inflation was broad-based. It’s clear that inflation will pose no worries for policymakers at the central bank when they meet next Wednesday,” said William Jackson, chief emerging markets economist at Capital Economics.

The bank’s benchmark Selic rate is already at a record low 3.0%. The only question is whether it is lowered by 50 or 75 basis points, economists say.

According to IBGE, the biggest deflation drivers in May were a 4.35% decline in gasoline prices and a 27.1% slump in air tickets on the month, both of which dragged overall transport costs down by 1.9%.

Of the nine sectors covered, six showed deflation in May and three recorded price rises, IBGE said.

Housing costs fell 0.25% and clothing fell 0.58% on the month, while food and drink costs rose 0.25% and household items rose 0.58%, IBGE said.

Brazil’s government on Tuesday launched the first programme in Latin America to fund infrastructure projects with the sale of so-called “green bonds”.

Three railways, which will have operating licenses auctioned, are expected to be certified as sustainable projects by the British organization Climate Bond Initiative (CBI), Brazil’s Infrastructure Ministry said in a statement.

The railways, Fiol, Ferrograo and Fico, will require 14.3 billion reais ($2.91 billion) in investments by their new private operators.

Global issuance of green bonds has reached $840 billion, Infrastructure Minister Tarcisio Gomes de Freitas said in the statement. Among the criteria that should be followed by the projects are low emissions and low use of fossil fuels.

Brazil on Wednesday approved a plan to complete its long-delayed third nuclear reactor Angra 3, with or without a partner joining Eletronuclear, the Eletrobras subsidiary that runs two existing two nuclear plants.

State-owned Eletrobras needs a private partner to help it finish the 1,400 megawatt reactor started in 2010. Possible candidates include companies in China, Russia, France and South Korea.

The private partner must be a minority stakeholder, said the Investment Partnership Programme (PPI) council that gave the approval.

So far, 9 billion reais ($1.8 billion) have been spent on the project that stalled in 2015 due to cost overruns and a corruption scandal involving contractors.

Eletronuclear President Leonam Guimaraes told Reuters last month that another 14.5 billion reais of investment is needed to finish the job.

The business model approved on Wednesday was devised by major lender, state development bank BNDES, and requires a private partner to share the financial burden.

PPI Special Secretary Martha Seillier said it could be hard to attract a partner unable to have a controlling stake.

Eletronuclear is seeking a partner not just in financing and building but also in operations.

Seillier said after Wednesday’s meeting, however, that investors were more interested in a building contract to complete the plant rather than a partnership.

The planned privatisation of Centrais Eletricas Brasileiras, Brazil’s largest utility known as Eletrobras, excludes the sale of its nuclear subsidiary. It has been held up in Congress and further delayed by the coronavirus pandemic until mid-2021. Deforestation of Brazil’s Amazon rainforest was worse than previously reported in 2019, revised government data showed on Tuesday, during the first year of President Jair Bolsonaro, who is keen to develop the forest crucial to curbing global warming.

Reuters