News & Analysis

Brazil’s headline inflation was again slightly above economists’ forecasts in February. Headline IPCA fell by only one hundredth of a percentage point from the previous month to 4.50%, slightly above expectations for a slowdown to 4.45%.

This is because inflation rose more than expected last month, climbing a surprising 0.83%, much higher than the 0.42% recorded in January and only comparable to the 0.84% growth recorded in February 2023. In our view, and despite the fact that year-on-year growth has technically decelerating for the fifth consecutive month since the mini-inflation spike in September, positive base effects account for much of this disinflationary advance at the beginning of the year and the faster run rate of near-term inflation pressures threatens another surge in headline inflation in the coming months. The primary threat to the disinflation process comes from core services inflation, a measure closely followed by the BCB. This is estimated to have continued to contribute positively in February, rising 0.45% on the month to extend its acceleration to five months now. Taken together, the latest inflation report from Brazil provides further evidence that the current pace of the BCB’s easing is likely to be reviewed in the coming months. This aligns with the details from February meeting’s rate statement, where guidance from the Monetary Policy Committee (Copom) suggested that the current pace of cuts would be maintained at least until the May decision.

Given our read of the data, we think the BCB will drop down to a pace of 25bps cuts by June, when the Selic rate will be 10.25%, as underlying inflation momentum warrants a continued restrictive stance.

According to the note accompanying the data, seven of the nine categories recorded increases in February, with core services inflation again making a large positive contribution in the reporting period. The largest change (4.98%) and the largest impact (0.29 pp) came from the Education category, within which the largest contribution came from regular courses (6.13%), due to the price readjustments that usually take place at the beginning of the academic year. Following Education, Communications was the second most inflationary category (1.56%), but not in terms of contribution, with Food and Beverages (0.20 pp) and Transport (0.15 pp) ranking second and third.

The most pressing development for the BCB was the fact that outside of education, the faster pace of inflation doesn’t scan as transitory. Risks of more persistent food inflation remain elevated, while a tight labour market and fiscal transfers suggest persistent services inflation.

Although the year-on-year reading of headline inflation has decelerated, albeit only marginally in February, the upward trend of the three-month annualised rates suggests disinflation progress may be coming to an end

All in all, the upward trend in core inflation remains a primary concern. However, the question remains as to whether the BCB considers that it has sufficient evidence that core and food inflation pose a real risk to headline inflation accelerating in the second half of 2024. This should be cleared up at next week’s BCB meeting, where the focus will rest on whether COPOM updates its forward guidance that “there is insufficient evidence to deviate from its current roadmap”.

Any tweak would likely prime markets for a slower pace of easing beyond May, as per our base case.


María Marcos, FX Market Analyst


This information has been prepared by Monex Europe Holdings Limited, part of Monex S.A.P.I. de C.V. (“Monex”). The material is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is, or should be considered to be, financial, investment or other advice on which reliance should be placed. No representation or warranty is given as to the accuracy or completeness of this information. All entities in the “Monex” group of companies are regulated for different products and services within the jurisdictions in which they operate. Details of the different entities can be found here. Details of the respective entities’ regulated status and available products and services can then be found on the relevant links to the individual jurisdictions’ website.