Brazil's inflation expected to hit new 18-year low despite recovery

By Bruno Federowski

SAO PAULO (Reuters) - Growing economic momentum in Brazil is not expected to have kept inflation from hitting a new 18-year low in August, a Reuters poll of economists showed on Monday.

The IPCA consumer price index probably rose 2.60 percent in the 12 months through August, according to the median of 23 forecasts in the poll, compared with an increase of 2.71 percent in the 12 months through July.

The reading, well below the bottom of the central bank's target range, should pave the way for another interest rate cut on Wednesday, a move that would just hours after the latest inflation figures are released. The central bank has pushed through a series of deep rate cuts since October.

Lower borrowing costs should continue to boost recent signs of economic improvement in Latin America's largest economy, such as a pickup in consumer spending and falling unemployment.

Second-quarter economic growth beat market expectations, sparking some optimism among economists who for months had forecast a sluggish recovery from the country's deepest recession in a century.

Still, economists said price hikes are unlikely to accelerate anytime soon.

Services inflation, which closely tracks the pace of economic activity, is likely to remain muted in August, according to forecasts, while an abundant harvest should curb food inflation.

"Inflation will continue its long-lasting decline course, driven mainly by ample slack in the economy and the favorable food price shock," wrote economists at Itaú Unibanco.

The IPCA index is expected to rise 0.31 percent in August from the previous month, due mainly to a mid-July fuel tax hike. That compares to a 0.24 percent increase in the previous month.

Estimates for the annual inflation figure ranged between 2.49 percent and 2.74 percent, while forecasts for the monthly figure varied from 0.22 percent to 0.47 percent, according to the poll.

(Reporting by Bruno Federowski; Editing by Paul Simao)

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