Brazil Price Outlook Surges as Analysts Forecast Lower Key Rate

  • Cut interest rate forecast to 14.64 percent from 15.25 percent
  • Raised 2016 inflation estimate to 7.23 percent from 7 percent

Brazil analysts raised inflation forecasts and pared estimates for the benchmark interest rate, after the central bank last week unexpectedly balked at increasing borrowing costs.

Analysts surveyed by the central bank expect the so-called Selic rate to reach 14.64 percent by year-end, down from last week’s forecast of 15.25 percent. They also increased their 2016 inflation estimate to 7.23 percent from 7 percent.

The central bank’s decision to keep interest rates unchanged at 14.25 percent last week came as a surprise to economists and traders, who expected hiking after inflation surged at the end of 2015. Policy makers indicated that Brazil’s recession and global turbulence contributed to its decision, raising questions whether they are under political pressure to focus on preserving the economy rather than stabilizing consumer prices.

The central bank’s decision caused the real to tumble, falling 1.4 percent the day after the meeting ended. It recovered later in the week along with emerging-market currencies as commodity prices rose, surging 1.5 percent to 4.0938 per U.S. dollar. Analysts in Monday’s survey expect the currency to close this year at 4.3 per dollar.

Consumer prices rose 10.67 percent in 2015 even as the economy shrank, exceeding the 6.5 percent ceiling of the target range. Gross domestic product will contract 3 percent this year before rebounding by 0.8 percent in 2017, according to the survey. Their prior forecast for next year was 1 percent growth.

That follows a plunge of an estimated 3.7 percent last year, according to analysts surveyed by Bloomberg. That would mark the deepest back-to-back recession on record, according to data from national economic research institute dating back to 1901.

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