Financial market forecasts 6.94% inflation in Brazil this year

Financial analysts have lowered the end-of-year inflation forecast for 2016 for the eighth consecutive week. This time, the forecast for the Broad National Consumer Price Index (IPCA), the official inflation gauge, was revised down from 6.98% to 6.94%. For 2017, the expected rate has been changed from 5.80% to 5.72%, in the fourth consecutive revision. The figures are part of the Focus Market Readout, a weekly report of financial market forecasts for key economic indicators released by the Central Bank on Mondays.

Despite the downward revisions, the forecast for inflation remains above the target of 4.5% for 2016 and 2017. The target ceiling is 6.5% this year and 6% in 2017. The Central Bank has the responsibility to keep inflation within the target.

Among the instruments used for influencing economic activity and inflation is the interest rate set by the Central Bank (SELIC), which provides a benchmark for other interest rates in the market. As an attempt to control inflation, the Central Bank's Monetary Policy Committee (COPOM) may decide to raise the SELIC rate in order to increase the cost of credit and encourage savings, which could help curb consumer demand. When the COPOM lowers the benchmark interest rate, credit tends to become cheaper, encouraging the production and consumption, but this weakens control over inflation.

Financial analysts' expectation for the SELIC rate at the close of 2016 has been maintained at 13.25% per annum. For next year, the expected rate has been revised down from 12% to 11.75% p.a. Currently, the SELIC rate stands at 14.25% p.a.

Economic activity

The forecast for the decrease in Gross Domestic Product (GDP) has broadened slightly from 3.88% to 3.89%, in the fifteenth consecutive deterioration. For 2017, the forecast has changed from 0.30% to 0.40% growth, in the second straight increase.

The decline in this year's industrial production is expected to be even bigger and reach 5.83% (compared to a previous forecast of 5.80%). For 2017, production is expected to grow, with expected increase revised from 0.54% to 0.50%.

The projection for the end-of-year dollar rate changed from R$3.80 to R$3.72 this year, and from R$4 to R$3.91 in 2017.

Translated by Mayra Borges