Brazil’s Inflation Slowdown Disappoints in April as Lula Eyes Interest Rate Cuts

Andrew Rosati
·4 min read
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(Bloomberg) -- Brazil’s inflation eased less than expected last month while still hitting the lowest level in two and a half years as President Luiz Inacio Lula da Silva clamors for the central bank to slash interest rates

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Consumer prices rose 4.18% in April from a year earlier, the national statistics agency said Friday, above the 4.12% median estimate of analysts surveyed by Bloomberg. From March, inflation stood at 0.61%.

Inflation has now slowed for 10 straight months to a pace not seen since the coronavirus upended Latin America’s largest economy. Despite the progress, policymakers remain concerned about price increases picking up again. That reluctance to bring down borrowing costs — and the pain caused to regular Brazilians’ wallets — is infuriating Lula, who wants to see big changes at the central bank.

But analysts saw Friday’s disappointing report dashing any hopes of rate cuts in the near term. “The central bank should continue with ‘Plan A’ — with the strategy that they’ve laid out of high interest rates for a longer period of time,” said Tatiana Pinheiro, chief economist at Galapagos Capital, an asset manager in Sao Paulo.

In April, all of the nine groups of goods and services tracked by the statistics agency become more expensive. Health and personal items that gained 1.49% and costs and food and beverages prices that rose 0.71% represented the biggest contributors.

Swap rates on the contract due in January 2025, which indicate investor sentiment for monetary policy at the end of next year, rose 11 basis points in morning trading as traders reacted to the higher-than-expected inflation print.

What Bloomberg Economics Says

“Both headline and underlying inflation were hotter than expected in April, which should take a June rate cut off the table. The results support the central bank’s assertion that slow disinflation warrants “serenity and patience.”

— Adriana Dupita, Brazil and Argentina economist

— Click here to read the full report.

Real Rates

Since returning to power in January, Lula has tangled with central bank chief Roberto Campos Neto, who took the benchmark rate to a six-year high of 13.75% to contain a post-pandemic price surge. The annual inflation rate has plunged from last year’s high of over 12%, to near the targets of 3.25% for 2023 and 3% for 2024 — with a tolerance range of plus or minus 1.5 percentage points.

The steep drop has left many wondering how much longer policymakers can hold borrowing costs at the current high level as protests from political leaders and fears of recession grow.

“Brazil’s real rates are around 8% and this is unsustainable,” said Andres Abadia, chief Latin America economist at Pantheon Macroeconomics. “Even under normal circumstances, interest rates will have to be cut soon.”

Frustration is growing across the region as none of Latin America’s major central banks have begun to embark on monetary easing. While policymakers in Brazil and Chile have been holding their key rate high for months, those in Mexico have continued to tighten.

Bank Leadership

Brazil’s monetary authority enjoys formal independence from the executive branch and, in its pursuit of hitting long-term inflation goals, has called for patience even as the economy cools off.

Lula seems unwilling to wait for long. This week, he named Gabriel Galipolo, the No. 2 at the Finance Ministry, to the fill a vacancy on the central bank’s board. The appointment hinges on Senate approval, but markets have buckled on fears the president is trying to undermine current monetary policy.

Read more: Lula’s Central Bank Nominee Says He Won’t Speed Up Rate Cuts

Galipolo, who some Lula allies float as a potential successor to Campos Neto when his term term ends in 2024, has pushed back on claims he’ll look to rush rate cuts.

But many market observers remain unconvinced by Galipolo’s comments as more vacancies on the central bank’s board will need to be filled in the coming months.

“He is the beginning of the process,” said Sergio Vale, chief economist with MB Associados, a consultancy in Sao Paulo. The leadership of the central bank “will turn left by the end of next year and the risks are that inflation expectations may start to increase.”

--With assistance from Leda Alvim, Giovanna Serafim, Robert Jameson and Josue Leonel.

(Adds economist comments starting in fourth paragraph)

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