Brazil Financial Institutions Project Inflation of 7.06 Percent for Year

By Jay Forte, Contributing Reporter

RIO DE JANEIRO, BRAZIL – The projection of financial institutions in Brazil for inflation, measured by the National Index of Consumer Price (IPCA) this year was adjusted from 7.04 percent to 7.06 percent according to government news sources. For next year, in 2017, the estimate remains at 5.50 percent since two weeks ago. The projections are part of research done every week by the Central Bank (BC) to financial institutions.

While the estimates are below what the BC Focus Report listed in April (7.14 percent), it is still well above the center of the inflation target of 4.5 percent.

The upper limit of the inflation target is 6.5 percent this year and six percent for 2017. The role of the Central Bank is to make inflation within the target. One of the instruments used to influence economic activity and, consequently, inflation is the Selic (annual benchmark interest rate).

When the Central Bank Monetary Policy Committee (COPOM) increases the Selic, the goal is to contain the fast growth, because higher interest rates means more expensive credit, but also stimulates savings. When the COPOM reduces the basic interest rate, credit becomes cheaper, encouraging production and consumption.

The median (when disregarding the extreme in the projections) expectations of financial institutions to the Selic rate increased from 12.75 percent to 12.88 percent at the end of 2016, and 11.38 percent to 11.25 percent year at the end of 2017. Currently, the Selic rate is 14.25 percent per annum.

The estimate of financial institutions of the economic recession this year has been slightly adjusted. The forecast for the fall of the Gross Domestic Product (GDP), the sum of all goods and services produced in the country, has been changed from -3.83 percent to -3.81 percent. For 2017, the estimated growth increased from 0.50 percent to 0.55 percent.

The projection for the dollar at the end of 2016 dropped from R$3.67/US$1 to R$3.65/US$1. The estimate for the end of 2017 from R$3.88/US$1 to R$3.85/US$1. This is after the real made a rally against the dollar reaching R$3.44/US$1 earlier this month.

The new finance minister of Brazil, Henrique Meirelles, announced earlier this month the appointment of Ilan Goldfajn as the new Central Bank president as part of the government’s plan to revamp the country’s ailing economy. Henrique Meirelles, said that one of the measures includes the creation of a ceiling limit for the public spending, where the spending of the year would not exceed the volume of the previous year plus inflation.