Brazil's financial analysts raise inflation forecast for 2016

The financial market's weekly projection for this year's inflation as measured by the Broad National Index of Consumer Price (IPCA) has been revised up for the fifth consecutive time, going from 7.19% to 7.25%. The forecast for 2017 has been maintained at 5.50% for the fifth consecutive week. The forecasts are part of the Focus Market Readout, a survey of financial institutions released by Brazil's Central Bank on Mondays.

Both projections are above the 4.5% inflation target. The upper target range is 6.5% this year and 6% in 2017.

The Central Bank is responsible for ensuring inflation stays within the target. One of the main instruments used for influencing economic activity with effects on inflation is the country's benchmark interest rate (SELIC).

Interest, GDP, and dollar exchange

The Central Bank has to make balanced decisions regarding the benchmark interest rate in order to make inflation stay within the target set by the National Monetary Council. It may increase the SELIC rate by making credit more expensive, in an attempt to contain price pressures created by high consumer demand. When the Monetary Policy Committee (COPOM) decreases the benchmark interest rate, it lowers the cost of credit and boosts production and consumption, but this could push prices up. The SELIC rate currently stands at 14.25% per annum.

The expected rate for the close of 2016 has been maintained at 13% p.a. The market expectation for 2017 has also remained stable at 11.25% p.a.

The projection for the Gross Domestic Product (GDP) trend is still negative, but the expected decline has been revised from 3.60% to 3.44% this year. For 2017, the GDP growth forecast has been maintained at 1%.

The projected dollar exchange rate has been revised from R$3.65 to R$3.60 at the end of this year, and R$3.81 to R$3.80 at the end of 2017.

Translated by Mayra Borges