Inflation in Brazil has fallen more quickly than even we had anticipated and, as such, we have pencilled in additional cuts to interest rates this year. We now expect the Selic to fall to 9.00% by end-2017 (previously 10.00%), which is a little below what is priced into the market. One consequence is that we are revising up our 2018 GDP growth forecast to an above-consensus 2.8%. Inflation in Brazil is dropping like a stone. Having peaked at 10.7% y/y in January last year, it is on course to drop to 5.0% y/y this month – the lowest reading in almost five years. We estimate that around a third of the drop can be accounted for by a fall in food inflation. But underlying price pressures are starting to ease too as the disinflationary effects of recession take hold and the impact of last year’s currency fall unwinds. The BCB’s measure of core inflation (which excludes energy and 10 food items) is now running at 5.6% y/y, down from 9.4% y/y in December 2015.
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