June 10, 2020 / 12:51 PM / a month ago

UPDATE 2-Brazil posts steepest monthly deflation since 1998, opens door to more rate cuts

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By Jamie McGeever

BRASILIA, June 10 (Reuters) - Inflation in Brazil continued to evaporate in May, official figures showed on Wednesday, 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. (Reporting by Jamie McGeever; Editing by Andrew Heavens, Chizu Nomiyama and Jonathan Oatis)

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