Brazil’s inflation fell below target in June to hit its slowest level since September 2020, clearing the way for the central bank to begin cutting interest rates at its next meeting.

Official data released Tuesday showed consumer prices rose 3.16% from a year earlier, down from 3.94% in May although slightly above the median estimate of 3.14% from analysts surveyed by Bloomberg. From the previous month, prices dropped 0.08%.

Annual inflation has tumbled from it 2022 peak of 12.13%, declining for 12 straight months under the weight of double-digit borrowing costs. The resulting drag on the economy, however, is infuriating President Luiz Inacio Lula da Silva, who has pledged to deliver growth and prosperity in his third term.

Since returning to power in January, he has clamored for lower interest rates. But central bankers, who are autonomous from the executive branch, have so far resisted his demands.

Tuesday’s consumer price report will add even more pressure on policymakers to begin monetary easing in August. The annual inflation rate is now below the bank’s 3.25% target for this year while underlying measures of inflation also saw drops on the month.

What Bloomberg Economics Says

“Slight deflation in the headline print — driven by falling food and transportation costs — brought year-over-year rate below target for the first time in nearly three years. The June data tip the scale toward an August rate cut, in our view.”

— Adriana Dupita, Brazil and Argentina economist

— Click here for full report

Despite signs its strategy is paying off, central bank board members remained cautious at their last gathering in June and held the Selic at a six-year high of 13.75% for a seventh straight meeting.

Inflation is easing across Latin America, where central bankers moved aggressively to contain prices in the aftermath of the pandemic. Brazil, however, is the only major economy in the region to see consumer prices rising less than its annual target.

In June, food and beverage prices dropped 0.66% — pulled down by falling soft commodity prices and a stronger real — and transport costs fell 0.41%. They were both the main drivers of the monthly decline in prices. Meanwhile, education costs rose 0.06% and personal expenses gained 0.36%.

Sealing Rate-Cut Deal

Even if inflation is widely expected to accelerate again in the coming months, the argument for holding borrowing costs steady is becoming harder to make. Credit is drying up for regular Brazilians and businesses, demand is falling and Lula and his team rage at the central bank chief, Roberto Campos Neto, almost daily.

“Inflation is falling and soon the interest rate will start to drop because the president of the central bank is stubborn but has no further explanation,” Lula said as the data was released.

Read more: Brazil Central Bank Signals Rate Cut as Lula Piles Pressure

Analysts have pointed to elevated readings of inflation that strip out volatile items like food and fuel to explain the central bank’s reluctance to start easing. Tuesday’s reading showed the year-over-year inflation slowed for most price groups tracked by the statistics agency.

“Price pressures appear to have eased quite broadly,” William Jackson, Chief Emerging Markets Economist at Capital Economics, wrote in research note published after the report. “Today’s data will seal the deal on an interest rate cut at the next central bank meeting.”

In the longer term, Brazil’s monetary policy may be heading for a less restrictive future. Last week, the Senate approved two of Lula’s nominees — Gabriel Galipolo and Ailton Aquino — to the central bank’s nine-member board of directors.

Previously the No. 2 at the Finance Ministry, Galipolo is considered by many political observers to be Lula’s next central bank chief in waiting when Campos Neto’s term concludes at year-end 2024. Critics say he will focus less on bringing down inflation and more on pursing the leftist president’s agenda.

Read more: Lula Puts an Ally on Track to Lead the Central Bank He’s Fought

For his part, Galipolo has pushed back on that assessment, saying his mission will be to diffuse tensions between the bank and president.

“My role is to establish dialogue and build bridges,” Galipolo told Bloomberg News last month.

--With assistance from Giovanna Serafim, Rafael Gayol and Maria Eloisa Capurro.

(Adds analysis and economist comment starting in fifth paragraph.)