MercoPress. South Atlantic News Agency

Low food prices and high interest rates behind Brazil's waning inflation

Braz fears that if the government is unable to meet its budget target in 2024, a devaluation of the real might ensue

After Brazil's statistics bureau IBGE (Brazilian Institute of Geography and Statistics) released the inflation for 2023 in the South American country (4.72%), Agencia Brasil delved into the possible reasons behind this achievement and determined that low food prices and high interest rates played a significant role.

Economist Gilberto Braga found that the figures show the success of the macroeconomic policy of the government and the Central Bank’s Monetary Policy Committee (Copom), which sets the country’s benchmark interest rate known as Selic, an index that remained high throughout the year but went down from 13.75% to 11.75% after four consecutive cuts in the second semester.

Braga pointed out there are price groups still putting pressure on the rates, “especially rents, which have been rising above the average inflation.” However, he went on to note that “food prices in general have been on the wane, which has offset the upward pressure in a positive way.”

“In 2024, this price behavior should continue, with inflation tending to decline,” he added while warning of risks coming from outside Brazil, such as ”external pressure, above all due to Russia’s war conflicts with Ukraine and the Middle East, which influence oil prices, insurance, and the free flow of international trade,” he declared. “Despite these threats, the outlook for 2024 is quite positive,” he also forecast.

Researcher André Braz, from the Getulio Vargas Foundation, said that the prices of agricultural and mineral commodities helped keep inflation in 2023 lower than expected at the start of the year when the market estimated it at 5.5%.

“On the agricultural side, soybeans, corn, and wheat, which are raw materials for various other foods, saw sharp falls in producer prices,” Braz explained. Soy fell by 21.92%. In the case of corn, the drop was even greater, 30.02%.

Braz estimates that Brazil’s official inflation should close out 2024 at around 4%. However, he also sees challenging factors, such as the war between Russia and Ukraine and the Israeli offensive against Hamas. El Niño, the climatic phenomenon that changes the temperature of the waters of the Pacific Ocean and impacts crops in various regions of the planet, was also named by the expert as a cause for concern.

On the domestic front, Braz mentioned that public spending could affect inflation if doubts arise as to whether the government will meet its budget target. Finance Minister Fernando Haddad has said he is aiming for a zero deficit by 2024.

“If this target is threatened, there could be a devaluation of the exchange rate [against the dollar], and this leads to inflation because we start importing things at a higher price,” he argued.

The economist believes that the Central Bank’s interest rate policy has fulfilled its role of curbing inflation in 2023, but he also remarked that the 11.75% Selic rate is still too high, which poses a challenge for the country’s growth and the generation of jobs and income.

Even with those challenges ahead, Braz thinks inflation will remain under control to allow for further reductions in the benchmark interest rate. “I believe that the Central Bank will be able to continue cutting the rate even if these challenges are on the radar. The Selic will probably end next year at around nine percent, who knows,” he stated.

(Source: Agencia Brasil)