MercoPress. South Atlantic News Agency

Brazilian inflation falls below 5% in May for the first time since September 2010

The central bank citing limited inflation risk cut the benchmark interest rate to 8.5%

Brazil’s inflation rate fell more than economists expected in May, pushing the annual pace below 5% for the first time since September 2010. Monthly inflation slowed to 0.36% from 0.64% in April.

Prices, as measured by the benchmark IPCA index, rose 4.99% in May from a year earlier, the national statistics agency said in Rio de Janeiro on Wednesday.

Brazil’s growth outlook, until recently a bright spot for global investors, has deteriorated over the past month, as economists surveyed by the central bank reduced their median estimate for expansion this year to 2.72% from 3.23%.

“We’ll be satisfied if we achieve growth in 2012 above growth in 2011,” Finance Minister Guido Mantega said last week, following expansion of 0.2% in the first quarter. The economy of the second-biggest emerging market after China grew 2.73% last year.

Citing limited inflation risks and a “fragile” international economy that helps slow consumer price rises, central bank President Alexandre Tombini last week cut the benchmark interest rate by 50 basis points to 8.5%. The bank has lowered the Selic rate by 400 basis points since August.

Traders expect policy makers to cut the rate to 8% in July before raising it to 9.5% by the end of 2013.

President Dilma Rousseff’s government has increased subsidized credit by the state development bank BNDES and cut taxes on consumer and industrial goods. The latest round of stimulus measures last month included tax cuts on vehicles, sales of which plunged 11% in April.

The Brazil Purchasing Managers’ Services index declined to 49.7 in May from 54.4 in April. Service price inflation slowed to 0.21% in May from 0.76% in April.

Despite Brazil’s weak economic performance over the past three quarters, inflation has remained above the 4.5% midpoint of the central bank’s target range for 21 months. As economic stimulus measures, including cuts in taxes and borrowing costs, take effect later this year, analysts predict annual inflation will accelerate again to 5.15% in 2012 and 5.60% next year, according to the latest central bank survey.

Transportation costs fell 0.58% in May after an increase of 0.1% in April and were the biggest contributor to slowing monthly inflation. Communications costs fell 0.19% compared with a rise 0.46% a month earlier. Food and beverage prices rose 0.73%, while housing costs were up 0.8%.

Said this it must be pointed out that Petrobras, Brazil’s oil and gas giant has been requesting an increase in the price of fuels but the government of President Dilma Rousseff has insisted on a stand-by.

A 13% depreciation of the Real since March has helped push up the cost of imports, including raw materials for agricultural and industrial goods. Policy makers have said that the impact of currency fluctuations on inflation has diminished in recent years and isn’t a concern.

In the minutes to its April 18 policy meeting the central bank said that any additional monetary easing should be carried out with “parsimony.” It will publish the minutes to last week’s Copom meeting on June 8.