Brazil CPI Outlook Said to Have Fallen Faster Than Expected

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The decline in inflation forecasts for next year in the Brazilian central bank’s weekly economists’ survey was steeper than the central bank expected, according to a government official familiar with the bank’s assessment, who asked not to be named because the projections aren’t public.

Analysts reduced their 2016 inflation estimate for the third straight week, to 5.40 percent from 5.44 percent in the previous survey, according to the median estimate.

The central bank sees inflation slowing to 4.5 percent next year and expects market forecasts to improve further as current inflation slows, according to the person.

The decline in inflation expectations shows that the central bank’s strategy of increasing interest rates is correct, the person said. Policy makers lifted the benchmark Selic last month for the sixth consecutive time, to 13.75 percent.

The measures currently taken by the monetary authority will allow interest rates to be cut and stay low in the future, the person said.

Swap rates, a gauge of projected changes in Brazil’s borrowing costs, fell 0.10 percentage point to 13.35 percent at 1:39 p.m. Sao Paulo time on the contracts maturing in January

2017.

Economic Normality

Brazil’s economy is heading toward normality now that unemployment is rising as economic activity decelerates, the person said.

Unemployment rates were kept artificially low because of the subsidies the government gave to companies, and, as those stimulus measures are withdrawn, the job market will adjust to its correct level. The equilibrium rate will be determined by the market, the person said.

Unemployment rose to 6.7 percent in May from 6.4 percent one month earlier and 4.3 percent in December.

Pessimist projections about the country’s growth are wrong, the person also said. Brazil’s gross domestic product will probably contract 1.7 percent in 2015 and grow 0.33 percent next year, according to the central bank survey.