Financial market expects Brazil's inflation to close out 2016 at 6.52%

The financial market expects Brazil's inflation to close out 2016 very close to the upper target range. According to the latest Focus Market Readout, a weekly Central Bank survey of projections from financial institutions, the forecast for the Broad National Consumer Price Index (IPCA), the official inflation gauge, was lowered for the fifth consecutive time this year going from 6.69% to 6.52%.The upper target range for inflation is 6,5% and the target is 4.5%.

The forecast for 2017 was revised from 4.93% to 4.90%, with the inflation targeted at 4.5% within an upper range of 6%.

Last Friday, Central Bank Governor Ilan Goldfajn said current inflation has been a positive surprise. “While it's true that margins, disinflation of some of the consumer price index components that are more sensitive to economic cycles, and monetary policy [decisions about interest] seem to be stagnating, positive surprises with inflation and weaker economic activity mean disinflation of these components is now more likely to pick up,” Goldfajn said.

With the economic recession and the improvement in inflation, the Central Bank has suggested it may cut the benchmark interest rate (SELIC) further. At its last two meetings, the bank's Monetary Policy Committee (COPOM) reduced the SELIC by 0.25 percentage points. Currently, the rate stands at 13.75% per annum. According to financial institutions, the SELIC rate could close out 2017 at 10.50% p.a.

The projection for this year's Gross Domestic Product has deteriorated, with the expected decline revised from 3.43% to 3.48%. For 2017, the growth forecast was lowered for the eighth straight time, going from 0.80% to 0.70%.

Translated by Mayra Borges