By Gabriel Araujo

SAO PAULO (Reuters) -Brazil’s annual inflation in June fell to its lowest level since September 2020, data from statistics agency IBGE showed on Tuesday, renewing bets that an interest rate cut is around the corner as consumer prices continue to trend down.

Annual inflation in Latin America’s largest economy slowed to 3.16% in June from 3.94% in May, in line with a market consensus of 3.17%. Prices fell 0.08% on a month-on-month basis, the first deflation registered since September of last year.

The figures are likely to support expectations that the central bank will start cutting rates as soon as next month, after it took a dovish tone at its last meeting in June, saying that an August cut was possible if the positive inflation scenario continued.

“The sharp fall in inflation last month makes it almost certain that the central bank will kick off its easing cycle at its next meeting,” said William Jackson, chief emerging markets economist at Capital Economics.

Brazil’s central bank has conducted one of the world’s most aggressive tightening cycles since early 2021 in a bid to tame high inflation, with the key Selic rate at a six-year high of 13.75% since August 2022.

With that work largely done, economists are pondering the size of the expected rate cut.

“We have penciled in a 25-basis-point reduction in the Selic rate to 13.50%,” Capital’s Jackson said. “But, if anything, the risks are starting to tilt towards a larger 50-basis-point move.”

Andrea Angelo, an economist at Warren Rena, was more certain of a 25-basis-point cut, saying the latest data on services inflation, closely watched by the central bank’s monetary policy committee (Copom), were worse-than-expected.

“That may support the arguments of the more cautious side of the Copom,” she said.

Local benchmark stock index Bovespa slid 1.7% after the inflation figures, while Brazil’s real weakened 0.5% against the dollar.

‘STUBBORN GUY’

The 0.08% consumer price fall from May to June was driven mainly by lower food, beverage and transportation costs.

While slightly smaller than the 0.1% decrease expected by economists polled by Reuters, the reading matched the level the central bank itself had forecast for the month in a quarterly inflation report released in late June.

Annual inflation is currently within this year’s target range of 1.75%-4.75%, although an uptick is expected from July because of unfavorable base effects.

Even so, private economists polled by the central bank have now lowered their estimates for this year’s inflation rate for eight consecutive weeks, currently forecasting it to end 2023 at 4.95%.

Brazilian President Luiz Inacio Lula da Silva, who has persistently called on the central bank to cut rates as he views the current high levels to be hindering economic growth, celebrated the downward trend in inflation.

“The central bank chief is a stubborn guy, but interest rates will start to fall soon,” Lula said in a live broadcast on social media, referring to central bank governor Roberto Campos Neto.

(Reporting by Gabriel Araujo; Editing by Conor Humphries, Paul Simao and Christina Fincher)

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