Brazil Economists Forecast Weaker Currency and Higher Key Rate

Brazil economists forecast a weaker real than predicted last week, in a move that will fuel inflation and force the central bank to further raise interest rates.

The real will weaken to 2.35 per U.S. dollar by the end of 2014 from 2.30 in December 2013, according to the Aug. 16 central bank survey of about 100 analysts published today. They previously saw the real at 2.28 in December and 2.30 a year later. Economists also raised their 2014 key rate forecast to 9.50 percent from 9.25 percent.

President Dilma Rousseff’s administration is working to accelerate economic growth while controlling inflation in the world’s second-largest emerging market. Officials this year have cut tariffs on more than 100 goods and have expanded subsidized credit for home appliances to stimulate activity. At the same time, policy makers have signaled they may extend the biggest key rate increases in the world to prevent higher prices from slowing consumption and investments.

The real, which dropped to the weakest in 4 1/2 years today, is complicating the government’s effort to control inflation. Brazil’s currency fell 15.7 percent in the past three months to 2.4122, the worst performance against the dollar among 24 emerging markets tracked by Bloomberg.

Swap rates on the contract due in January 2015, the most traded in Sao Paulo today, rose 21 basis points, or 0.21 percentage point, to 10.54 percent at 9:06 local time.

Faster Inflation

While prices as measured by the IPCA index rose 0.03 percent in July from the month prior, the slowest increase in three years, monthly inflation will likely accelerate, central bank director for economic policy, Carlos Hamilton, said Aug. 12. Annual inflation in July slowed to 6.27 percent after surpassing the 6.5 percent upper limit of the central bank’s target range in March and June.

Inflation prompted policy makers to raise the Selic by 50 basis points to 8.50 percent in July after increases of 50 basis points and 25 basis points in May and April. The central bank board at its Aug. 27-28 meeting will raise borrowing costs by at least an additional 50 basis points, swaps show.

Economists raised their 12-month inflation forecast to 5.97 percent from 5.95 percent a week earlier, according to the central bank’s survey.

Before it's here, it's on the Bloomberg Terminal.