Brazil falls into deflation in June, paving way for central bank rate cuts

Brazil sank into deflation in June for the first time since 2010 amid broad price declines driven by favourable weather, lower energy costs and weak domestic demand, possibly opening the door to further central bank interest rate cuts.

Base effects also played a hand, according to economists at Pantheon Macroeconomics.

The unadjusted IGP-M index revealed a 0.6% drop in the level of prices in South America's largest economy.

Wholesale inflation, which accounts for the bulk of the index, dropped by 1.2% on the month, versus a 2.2% increase in the same month one year ago.

Within the above, agricultural and raw materials' prices also fell back sharply, as did those for petrol, according to Andres Abadia, senior international economist at Pantheon Macroeconomics.

Also on an unadjusted basis, consumer prices dipped by 0.1% over the month, capped by weak growth domestically.

Construction costs on the other hand advanced by 1.4%.

Abadia expected the rate of decline in prices to slow but nevertheless extend into the third quarter of 2017.

"The rate of decline of inflation will slow, though, as favourable base effect start to fade. Still, the improving inflation picture, and falling inflation expectations, will allow the BCB to cut rates further in Q3 and Q4."