Brazil Analysts See Deeper Recession, Faster CPI, Higher Rates

Brazil analysts forecast the central bank will be forced to raise borrowing costs next year even as Latin America’s largest nation enters a worse recession than previously expected.

Policy makers will increase the benchmark rate to at least 14.5 percent next year, compared to the previous week’s forecast of 14.25 percent, according to the Dec. 11 central bank survey of about 100 economists. Analysts expect the economy in 2016 to shrink 2.67 percent, versus a 2.31 percent contraction seen in last week’s survey.

Brazil is caught between accelerating inflation and contracting output, which is complicating policy makers’ response to the crisis. Congress has focused on impeachment proceedings, which are sidelining fiscal austerity proposals that President Dilma Rousseff’s government says would help tame inflation and spur growth. That has left the onus for reining in above-target price increases squarely on monetary policy.

Brazil is heading toward its first two-year contraction since 1931, according to the government’s economic research institute. Still, economists’ outlook for inflation is also worsening. Analysts forecast that inflation will finish 2016 at 6.8 percent, faster than their previous forecast 6.7 percent.

The central bank says it plans to bring inflation to its 4.5 percent target in 2017, and in its Nov. 24-25 monetary policy meeting held the Selic rate at 14.25 percent -- the highest level since 2006. Rising political and economic uncertainties threaten to keep consumer price increases above target for longer than initially expected, the central bank said in the minutes of the meeting.

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