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Surprise drop in Brazil inflation paves way for sharper rate cut

By Silvio Cascione

By Silvio Cascione

BRASILIA (Reuters) - Brazil's inflation rate eased much more than expected in February to its lowest level since 2010 amid a deep recession, data showed on Friday, strengthening the case for a steeper interest rate cut by the central bank next month.

Consumer prices rose 4.76 percent in the 12 months through February, according to government statistics agency IBGE's IPCA index, slowing from an increase of 5.35 percent in January.

February's inflation came in below expectations of all 24 economists polled by Reuters. The index also undershot expectations for a seventh straight month.

For the first time since 2009, annual inflation is lower in Brazil than in emerging market peer Mexico, where price increases shot up to their highest rate in nearly seven years after the U.S. presidential election sparked a sharp drop in the Mexican currency.

Brazil's sudden inflation slowdown highlights the unprecedented severity of the country's two-year recession and is helping President Michel Temer's economic team to restore the credibility of fiscal and monetary policy to curb price rises.

"That's the kind of inflation rate that every central banker would like to see," said Marco Caruso, an economist with Banco Pine in São Paulo. "But it's a good outcome of something that is really bad: a very poor economic situation."

Yields on interest rate futures fell sharply on Friday as investors saw a greater likelihood that the central bank would cut its benchmark interest rate by 100 basis points in April.

The bank reduced the rate by 75 basis points at its last monetary policy meeting in February.

Most economists expect Brazil's inflation to fall below the official goal of 4.5 percent this year, which would likely lead the government to cut the target for 2019 and beyond, according to Reuters surveys.

The IPCA index rose 0.33 percent in February, the smallest increase for the month since 2000.

(Reporting by Silvio Cascione; Editing by Lisa Von Ahn and W Simon)

 

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