Financial market revises forecast for economic decline further down

The financial market's projection for the economic decline this year continues to be revised downwards. According to the Focus Market Readout, a weekly report published by the Central Bank based on projections from financial institutions for key economic indicators, the Brazilian economy should shrink 3.45% this year, compared to a previous forecast of 3.40% decline. For 2017, the projection for Gross Domestic Product (GDP) growth has been maintained at a positive 0.50%.

As for inflation, financial institutions expect declines in the Broad National Consumer Price Index (IPCA), the government's official inflation gauge used for informing inflation targets. This year should close out with 7.57% inflation, revised from a previous 7.62%.

SELIC

In the current scenario of economic downturn, financial institutions do not expect the Central Bank's interest rate (SELIC) to change this year. It is expected to close out the year at its current level of 14.25% per annum. The next meeting of the Central Bank's Monetary Policy Committee (COPOM) that sets Brazil's interest policy should take place on March 1 and 2. For 2017, the median of expectations for end-of-year SELIC (excluding end values from the projected ranges) is 12.50% p.a.

The SELIC rate is used for trading government securities under the Special System of Settlement and Custody (SELIC) and provides a benchmark for other interest rates in the economy. The Central Bank may raise interest to control excess demand that pushes prices up. Conversely, lowering the benchmark interest rate makes the cost of credit cheaper, which boosts production and consumption levels, but loosens control over inflation.

Translated by Mayra Borges