Brazil’s Grim Day Moves Analysts to Raise Selic, CPI Calls

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Brazil economists raised their 2015 inflation forecast, dimmed their outlook for economic activity and boosted their estimate for the benchmark rate this year after three sets of worse-than-expected data came out June 19 and construction executives were arrested.

Analysts boosted their forecast for inflation to 8.97 percent from 8.79 percent, according to the June 12 central bank survey of about 100 analysts published Monday, and raised their call for the Selic rate at year-end to 14.25 percent from 14 percent. They also reduced their forecast for 2015 gross domestic product, to a 1.45 percent contraction from a 1.35 percent drop previously.

Policy makers are struggling to navigate the combination of surging inflation and withering economic activity. Job losses are mounting and consumer confidence has retreated as the government tightens policy. Its plan to draw infrastructure investment to boost growth may face new headwinds with more of the nation’s biggest builders entangled in a kickback scandal.

“We’ve seen recurrent downward revisions to GDP, recurrent upward revisions to inflation and, consistent with the central bank’s tough rhetoric on inflation, the market expects more rate hikes this year,” Alberto Ramos, chief Latin America economist at Goldman Sachs Group Inc., said by phone. “Some people say they’ve gone too far, but if you don’t get a grip on inflation the economy will remain weak.”

Swap rates on the contract expiring January 2017 rose one basis point, or 0.01 percentage point, to 14.05 percent at 9:02 a.m. local time. The real strengthened 0.3% to 3.0892 per U.S. dollar.

Annual Rate

Consumer prices in the month through mid-June rose more than estimated than all analysts surveyed by Bloomberg, pushing the annual rate to 8.8 percent, according to data the statistics institute released June 19. The central bank targets 4.5 percent inflation, plus or minus two percentage points.

The same day, the central bank published the seasonally adjusted economic index, a proxy for gross domestic product, which fell 0.84 percent in April -- below all but one estimate from 33 economists surveyed by Bloomberg. Data released by the Labor Ministry later showed Brazil’s economy shed 115,599 jobs in May, more than all but one forecast.

Goldman Sachs revised its second-quarter GDP forecast down to a 1.25 percent contraction, from 1 percent previously, and Bank of America Merrill Lynch cut its full-year GDP forecasts to a 1.8 percent decline from 1.3 percent before.

Construction Companies

Complicating the outlook for activity, executives from two of the nation’s largest construction companies, Odebrecht and Andrade Gutierrez, were arrested the same day in connection with the Carwash investigation into bribes at the state-run oil company.

“Implicating Odebrecht and Andrade Gutierrez certainly casts a much larger cloud over the cycle of investments in logistics infrastructure -- a sector the government is banking on to drive an economic recovery in 2016,” Christopher Garman, head of country analysis at Eurasia Group, wrote in a note.

In a bid to stem consumer price increases, central bank directors have raised the key interest rate in six straight meetings, to 13.75 percent. That’s the highest since January 2009.

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