Brazil central bank flags demand-driven inflation as economists scale back rate-cut bets

BRASILIA, June 3 (Reuters) - Brazil's ‌central bank is ​seeing ​demand-driven pressures contributing to inflation, Governor Gabriel Galipolo said on Wednesday, pointing to measures that exclude supply shocks, such as those ‌linked to the Iran conflict.

The level of demand-driven inflation is ⁠inconsistent with the bank hitting its 3% target, he said.

Speaking by videoconference at a forum ‌in Lisbon, Galipolo said services ‌inflation, which is sensitive domestically, has reflected a resilient economy, with historically low unemployment, record-high income and wage growth outpacing productivity, alongside consumption ​supported by credit.

"We do see the effects of supply shocks on prices, but several core measures that strip out those effects ... especially in ⁠services and other labor-intensive segments, show inflation running at levels clearly inconsistent with meeting the target," he ​said.

His remarks come as Brazilian banks have been trimming expectations for further monetary easing, citing a challenging domestic inflation ​outlook, with risks stemming not only from ‌higher oil prices amid Middle East tensions, but also from domestic stimulus under President Luiz Inacio Lula da Silva ⁠ahead of the October election.

Policymakers began easing in March with a 25-bps cut, followed by another in April, bringing the Selic to 14.5%. Twelve-month inflation stood at ⁠4.64% in mid-May.

"Inflation prospects in Brazil have worsened due to both supply and demand factors," ​XP said in a note on Wednesday, expecting two additional 25-basis-point cuts in the benchmark Selic rate to 14%, down from three cuts previously.

BTG Pactual took a more ‌hawkish stance, forecasting a final 25-bps cut at this month's meeting, with the Selic held at 14.25% through year-end, ‌versus a prior terminal rate of 13%.

BTG economists led by Tiago Berriel said ⁠the outlook could already warrant ‌a pause, citing more ​adverse inflation readings, resilient activity, firm labor and credit data, and unanchored expectations, including for 2028.

(Reporting by Marcela AyresEditing by ‌Rod Nickel)

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