February 8, 2017 / 11:25 AM / a year ago

UPDATE 3-Brazil's plunging inflation fuels rate cut bets

 (Recasts with more comments, market reaction, background)
    By Silvio Cascione
    BRASILIA, Feb 8 (Reuters) - Consumer prices rose less than
expected in Brazil in January for the fifth straight month,
increasing the chances of steeper interest rate cuts and a
stronger economic recovery as the inflation rate falls toward
the government's long-missed target.
    The annual inflation rate eased by nearly a percentage point
to 5.35 percent in the 12 months through January, below
economists' expectations of 5.41 percent, government statistics
agency IBGE said on Wednesday.
    Prices rose 0.38 percent from a month earlier, the smallest
rise for January since 1994. 
    The surprising pace of the inflation slowdown has boosted
consumer and business confidence, helping the economy pull
through its worst recession in decades. Lower inflation also
comes as relief for unpopular President Michel Temer as he
pushes an austerity agenda through Congress.  
    Yields on Brazil's two-year benchmark bond fell to a 2013
low, a boon to fixed-income investors who have benefited from
increasing expectations that the central bank will cut interest
rates to below 10 percent this year. 
    "Single-digit rates this year, something that was very
questionable until recently, are increasingly feasible," Sandra
Pires, chief analyst at São Paulo-based brokerage Coinvalores,
wrote in a research note.
    Yields on long-term bonds could drop further if the
government cuts its annual inflation target, as most economists
forecast. They expect the current goal of 4.5 percent to be
achieved in the second quarter, for the first time since 2010.
    Banco Fator Chief Economist José Francisco de Lima Gonçalves
 said he saw room for the central bank to accelerate the pace of
rate cuts this month to 100 basis points, from 75 basis points
at its last meeting. Most economists and traders still expect
the bank to keep its current pace of easing.
    Inflation is a sensitive issue in a country traumatized by
runaway prices in the past. It contributed to the eroding
popularity of former president Dilma Rousseff, who was ousted
last year, by climbing past 10 percent until early 2016. 
    Slowing inflation should boost Temer's approval ratings from
near-record lows even as unemployment remains high, Banco Fibra
Chief Economist Cristiano Oliveira said. 
    "All else equal," Oliveira wrote in a note, "Temer's
popularity will be up in 2018, an election year."
    Below is the result for each price category:     
                                  January    December
 - Food and beverages                0.35        0.08
 - Housing                           0.17       -0.59
 - Household articles               -0.10       -0.31
 - Apparel                          -0.36        0.32
 - Transport                         0.77        1.11
 - Health and personal care          0.55        0.49
 - Personal expenses                 0.45        1.01
 - Education                         0.29        0.07
 - Communication                     0.63        0.02
 - IPCA                              0.38        0.30
 (Reporting by Silvio Cascione; Editing by Lisa Von Ahn)
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