Market News

By Gabriel Araujo

SAO PAULO (Reuters) -Brazil's inflation rate slowed more than expected in May, but the 12-month gauge remained above the central bank's target, raising questions about what stance policymakers will take at their interest rate-setting meeting next week.

Consumer prices in Latin America's largest economy rose 0.26% last month and 5.32% in the 12 months through May, statistics agency IBGE said on Tuesday, undershooting forecasts for rises of 0.33% and 5.40%, respectively, in a Reuters poll of economists.

The data marked a decline from April's 0.43% monthly rate and the 12-month reading of 5.53%, though the latter exceeded the official target of 3% plus or minus 1.5 percentage points for an eighth consecutive month.

Brazil's central bank will hold its rate-setting meeting on June 17-18, with policymakers vowing "flexibility and caution" while still voicing discomfort with above-target inflation.

They have said they would remain data-driven and keep their options open after raising the central bank's benchmark interest rate by 50 basis points to 14.75% last month, a sixth straight hike that pushed borrowing costs in Brazil to their highest level in nearly 20 years.

Following the release of the latest inflation data, markets were pricing in a 76% chance that the central bank would halt its tightening cycle and hold rates steady next week, while the remaining 24% leaned toward a 25-basis-point hike.

Jason Tuvey, deputy chief emerging markets economist at Capital Economics, said it was "more likely than not" that policymakers would deliver a final 25-basis-point hike next week, citing the strength of underlying price pressures, robust economic growth in the first quarter and a tight labor market.

Tatiana Pinheiro, chief economist at Galapagos Capital, also forecast that the central bank would hike its benchmark rate to 15%, saying that despite the more favorable consumer price data, activity was resilient and inflation items sensitive to monetary policy remained under pressure.

However, Julio Cesar de Mello Barros, an economist at Banco Daycoval, said the lower-than-expected inflation data "pointed toward the end of the interest rate hike cycle at the next meeting," with an expectation that cuts would resume in 2026.

IBGE noted that the costs of transport and household articles dropped in May. Food and beverage price increases, which are closely watched, slowed to 0.17% from 0.82% in April.

(Reporting by Gabriel Araujo; Editing by Kirsten Donovan and Paul Simao)