Inflation

Latin America’s largest country released inflation and price figures for September. The numbers are positive for the Brazilian economy, but by no means is the country in strong economic shape. With the economy contracting and inflation falling slightly, it may be time for the Central Bank of Brazil to reexamine its monetary policies.

As reported by Reuters, inflation in Brazil in September was the lowest in more than a decade. Prices of food and beverage, houseware, and transport fell 0.29, 0.23, and 0.10 percent, respectively. The lower than expected inflation last month puts a small dent in overall inflation for 2016, which is well above the central bank’s target of 4.5 percent.

Overall inflation was Prices in Brazil rose 8.48 percent from September 2015 to September 2016, a slight decline from the 8.97 percent increase from August 2015 to August 2016. These rates are slightly lower than the International Monetary Fund’s 9.019 percent estimate for inflation in Brazil for this year as reported in the IMF’s World Economic Outlook Database.

In an attempt to bring inflation closer to the 4.5 percent target, the Central Bank of Brazil has maintained a benchmark interest rate of 14.25 percent since last year. However, government officials are reexamining their priorities vis-a-vis reducing inflation and promoting economic growth through monetary policy.

As Reuters reports, the Central Bank has previously indicated that “any rate cuts would be conditioned to lower food prices, evidence of falling inflation and progress in Temer’s fiscal agenda.” These three criteria have recently been met.

The recent economic data show a fall in food prices and inflation and, as Reuters reports, Temer recently won a preliminary victory in Congress.

Any drop in interest rates is likely to be small. Given the recent news mentioned above, a drop in the benchmark from 14.25 to 14 percent is likely to occur in October. Such a drop could signal an acceptance by the government to accept slightly higher than desired overall inflation if it means that the economy will grow.

Given the precarious position of the Brazilian government and the Temer administration, we will not see any radical changes occur anytime soon. However, as Brazil faces the dilemma of promoting economic growth and reducing inflation, it may discover that it cannot do both.