August 23, 2017 / 1:15 PM / a year ago

UPDATE 2-Brazil inflation hits fresh 18-year low, fuels rate cut bets

 (Adds analyst comments)
    By Bruno Federowski
    SAO PAULO, Aug 23 (Reuters) - A smaller-than-expected rise
in Brazil's consumer prices in mid-August pushed inflation to a
new 18-year low, keeping the central bank on track to cut
interest rates aggressively.
    The IPCA-15 consumer price index rose 2.68
percent in the 12 months through mid-August, below the 2.73
percent expected in a Reuters poll and down from 2.78 percent in
mid-July, statistics agency IBGE said on Wednesday.
    The reading is far below the bottom end of the central
bank's annual target range of 4.5 percent plus or minus 1.5
percentage points, supporting bets of a sharp rate cut at the
central bank's September meeting.
    Food and beverage prices slipped 0.7 percent, extending a
string of drops driven by a strong agricultural harvest and
leading economists at JPMorgan to cut their estimates for
year-end inflation to 3.5 percent from 3.9 percent.
    But disinflation was widespread, thanks to a
slower-than-expected economic recovery and double-digit
unemployment. So-called core inflation, which strips the price
index of volatile food prices, came in below the bottom-end of
the target range at 3.4 percent.
    UBS economists revised their forecast and now expect the
central bank in September to reduce rates by 100 basis points
from 75 basis points previously, aligning with the growing
market consensus. It would be the fourth 100-basis point cut
that the bank has made.
    Yields paid on interest-rate futures fell.
    "Inflation will allow the BCB to keep the current Selic
easing pace," they wrote in a report.
    Slowing inflation in Brazil parallels weakening price
pressures in developed economies, where tepid global economic
growth has kept central banks on edge.
    Brazilian consumer prices gained 0.35 percent in the month
to mid-August due to a one-off increase in fuel taxes, as well
as a regulatory decision to raise power rates as scarcer rains
sapped hydroelectric generation. Economists expected a 0.40
percent monthly increase.
    Below is the result for each price category:
 (monthly percent change)    Mid-August  Mid-July
 - Food and beverages        -0.65       -0.55
 - Housing                   1.01        0.24
 - Household articles        0.21        -0.55
 - Apparel                   -0.29       0.04
 - Transport                 1.35        -0.64
 - Health and personal care  0.73        0.14
 - Personal expenses         0.34        0.31
 - Education                 0.19        0.08
 - Communication             -0.32       0.00
 - IPCA-15                   0.35        -0.18
 (Reporting by Bruno Federowski; Editing by Paul Simao and Lisa
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