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What to Expect for Brazilian Interest Rate in 2016

Monetary Policy Committee (COPOM) has decided to keep the Brazilian interest rate benchmark in Brazil (SELIC) at 14.25% a year, unanimously. The central bank repeated the note issued with the previous decision, in which it says “we see advances in the inflation fighting but the still elevated cost of living and expectations are out of the target”.

Even with the repeated note, economists started to review their opinions about when the interest rate will go down again. The last meeting was still ran by central bank president Alexandre Tombini. Now, Ilan Goldfajn will be the one responsible  to deal with variables like economic recession and inflation. Inflation, by the way, that was showing signs of reduction but has again showed resilience.

According to newspaper Folha de São Paulo, despite inflation have shown acceleration in May, the interim government of Michel Temer believes that the fall in the US Dollar exchange rate and the credibility of the new economic team opens space for a reduction in the SELIC. The government is working under the assumption of inflation declaration by year end as well as a further drop in the US$. According to the report, Folha’s initial forecast was for a drop in the interest rate in July but now this may be postponed till August.

And that review in expectation was also followed by other investment banks, such as Goldman Sachs and Bradesco. Bradesco now believes the interest rate benchmark will end the year at 12.75% versus 12.25% before.

Brazil’s Inflation Unexpectedly Slows as Recession Bites

Brazilian inflation unexpectedly slowed last month, beating forecasts from all analysts surveyed by Bloomberg, as food prices rose less than in the previous month amid a deepening recession.The benchmark IPCA inflation index moderated to 0.96 percent in December from 1.01 percent in November, the national statistics agency said Friday. That compares to the median 1.05 percent estimate from economists surveyed by Bloomberg.

“It’s good news in the near-term, but not something that shows clearly that core prices will be trending down,” Carlos Kawall, chief economist at Banco Safra, said about slowing inflation. “The fact that it came mostly from food prices doesn’t show that we can celebrate this.”

Brazil missed its 2015 target as annual inflation accelerated to 10.67 percent, the fastest for a full year since 2002 and more than double the midpoint of the official target range of 2.5 percent to 6.5 percent. As a result, central bank President Alexandre Tombini had to publish an open letter to the government explaining why he fell short.

Inflation isn’t expected to fall within range this year either, even as the deepening recession and higher borrowing costs chip away at Brazilians’ purchasing power. Leading economists forecast policy makers will redouble efforts to contain consumer prices by embarking on a new round of monetary policy tightening as early as this month.

Traders agree, as swap rates on the contract due in April 2016 rose 2 basis points to 14.66 percent on Friday. The real strengthened 0.5 percent to 4.0248 per U.S. dollar amid improved appetite for emerging-market assets. It dropped 33 percent last year, the worst performer among all 31 major currencies tracked by Bloomberg after the Argentine peso.

The real’s depreciation fueled inflation last year, as did the rising price of government-regulated items, Tombini wrote in his open letter to Finance Minister Nelson Barbosa. He reiterated his commitment to reach the 4.5 percent target in 2017, while Barbosa said in a statement that the government would contribute with fiscal policy and measures designed to boost productivity.

“No matter what happens with other policies, the central bank will adopt the measures needed to meet the target,” Tombini wrote.

Banco Safra’s Kawall expects a 150 basis-point tightening cycle this year, starting in January. Higher interest rates would be a bitter medicine for an economy headed to a deep two-year recession, forecast to be the worst since at least 1901. Fearing more job losses, members of President Dilma Rousseff’s Workers’ Party have publicly opposed additional increases to borrowing costs. December data strengthens the case for holding off, according to Enestor dos Santos, principal economist at BBVA.

“We should be more patient and wait for more data, but in my view it takes some pressure off the central bank,” Dos Santos said. “Inflation peaked in December and it will start to decline from January. I think this would not be the best moment for the central bank to tighten monetary policy.”

Deeper Recession

The central bank has held the Selic rate at a nine-year high even as Brazil’s recession deepened. The slump contributed to slower price increases for food and beverages as well as housing. The biggest single contributor to inflation in the month was the price of airfare, a volatile component that rose 37.07 percent.

A rate increase at the January meeting of the monetary policy committee known as Copom isn’t a foregone conclusion, with banks including BBVA and Banco Fibra expecting no change. Higher borrowing costs would hurt investment more than contain inflation, and Brazil should instead consider raising its inflation target, Workers’ Party President Rui Falcao said in a Dec. 28 interview.

“Any dovish decisions in the next Copom meetings will spur market suspicion that the central bank is facing greater political interference, even if technical reasons for a more moderate approach exist,” Chris Garman, managing director at political consultancy Eurasia Group, wrote in a note before the release of the data.

Central Bank in Brazil Forcasts 2016 Inflation Above Target Ceiling

While there was a consensus among financial analysts that consumer inflation in Brazil would top ten percent this year, the latest report by the Central Bank (CB) shows that analysts’ forecasts for 2016 inflation are also above the target limit of 6.5 percent. According to financial institutions surveyed by the CB for its Focus Report, inflation in 2016 is likely to reach 6.64 percent.The Focus Report, released by the Central Bank on Friday shows that forecasts for the 2015 inflation increased for the 10th consecutive time, going from 10.04 percent to 10.33 percent. Now, according to the BC inflation is only expected to fall within the target range in 2017.

This is the first time analysts have forecast inflation above the government target for 2016. If analysts’ forecasts are confirmed for this year and next year, it will be the first time official inflation is registered above the target ceiling for two consecutive years since 2002-2003.

According to the government’s system the center of inflation target is 4.5 percent, with a two percent tolerance in each direction, so that consumer inflation falling anywhere between 2.5 percent and 6.5 percent is considered within the target.

Consumer inflation is one of the indexes taken into consideration by the CB’s Monetary Policy Committee (COPOM), when deciding the benchmark interest rate (SELIC). According to financial analysts surveyed by the CB for the Focus Report, the SELIC which has been increased for the past seven consecutive meetings, is likely to remain stable during the upcoming Committee meeting this week, at 14.25 percent. This will be the last meeting of the COPOM this year.

Other indexes, like the IPCA (Consumer Price Index) in Brazil, rose by 0.82 percent in October, and according to the IBGE (Brazilian Statistics Bureau) it the highest inflation for the month since 2002. In this index the inflation rate now accumulates an increase of 8.52 percent for the first ten months of the year, the highest for the period since 1996.

Brazil Inflation

Below you will find the main Brazilian inflation indexes in the recent months, as well as the accumulated in the last two years and in the last 12 months.

Wondering what each of indexes mean? Find out what they mean here. Or find more about the perspective for the Brazilian Inflation and interest rate moving forward

nov/17 oct/17 Acumulated in
2017 * 2016 12 meses *
IPCA (IBGE) 0,42 2,21 6,29 2,70
INPC (IBGE) 0,37 1,62 6,58 1,83
IPCA-15 (IBGE) 0,32 0,34 2,58 6,58 2,77
IPCA-E (IBGE) 1,90 6,58 2,56
IGP-DI (FGV) 0,10 -1,94 7,18 -1,07
Núcleo do IPC-DI (FGV) 0,24 2,59 6,76 3,44
IPA-DI -0,03 -4,57 7,73 -3,53
IPC-DI 0,33 2,64 6,18 3,16
INCC-DI 0,31 3,85 6,13 4,38
IGP-M (FGV) 0,20 -1,91 7,17 -1,41
IPA-M 0,16 -4,37 7,64 -3,86
IPC-M 0,28 2,54 6,25 3,01
INCC-M 0,19 3,59 6,35 4,15
IGP-10 (FGV) 0,24 0,49 -1,31 6,95 -1,11
IPA-10 0,21 0,67 -3,58 7,30 -3,37
IPC-10 0,32 0,18 2,94 6,44 3,03
INCC-10 0,30 0,11 3,83 5,84 4,15
IPC (FIPE) 0,32 1,42 6,54 2,30
ICV (DIEESE) 0,88 2,01 6,15 2,41

IPCA, IGP-M, IPC, INCC. How to make sense of Brazilian Inflation indexes?

In this article, we explain the difference between the many Brazilian inflation indexes and do some parallel to US equivalent indexes, where relevant.

Recent inflation information for brazil can be found here. Or find more about the perspective for the Brazilian Inflation and interest rate moving forward

IPCA (Índice Nacional de Preços ao Consumidor Amplo) – Broad National Consumer Price Index: Equivalent to the CPI in the US. This is the official consumer inflation index. Federal government uses it to set inflation goals. Current target is 4.5% with a margin of 2% higher or lower. The 2.5% – 6.5% IPCA range is targeted by the central bank when defining the interest rate, SELIC. The index is calculated by IBGE (federal geography and statistics institute) and tracks continuous and systematic variations in consumer prices for families with income of up to 40 minimum wages. Data is collected in the metropolitan areas of Belém, Recife, Fortaleza, Salvador, Belo Horizonte, Rio de Janeiro, São Paulo, Curitiba, Porto Alegre, Brasilia and Goiânia. Data is collected between the first and last day of the reference month, and is disclosed between the 8th and the 12th of the following month.

 IGP-M (Índice Geral de Preços do Mercado) – General Index of Market Prices: Considered equivalent to the PPI – Producer Price Index, in the US. From Fundação Getúlio Vargas (a private entity), it was created to correct some treasury securities and floating-rate bank deposits with maturities over one year. Later, it started to be used for corrections of contracts such as real estate rent and electricity. Disclosed at the end of the reference month since the collection is made from the 21st of the previous month and the 20th of the month to which it relates. It consists of IPA – Wholesale Price Index (60%), IPC – Consumer Price Index (30%) and INCC – National Index of Construction Cost(10%). Every 10 days, it is disclosed a partial number known as IGP-10.

IPC – aka IPC-FIPE – (Índice de Preços ao Consumidor) CPI – Consumer Price Index: This is the inflation index for the city of São Paulo, largest city in Brazil. FIPE (a foundation linked to USP – University of São Paulo) measures the IPC based on a consumer with income between 1 and 20 minimum wages. The basket of products and services tracked is based on the POF – Household Budget Survey from IBGE, constantly updated. The survey is conducted between the first and last day of the reference month and published between the 10th and 20th of the following month. It is the most traditional cost of living indicator for the families in São Paulo and one of the oldest in Brazil, since January 1939.

INCC-DI (Índice Nacional de Custo de Construção, Disponibilidade Interna) – National Index of Construction Cost, Internal Availability: From Fundação Getúlio Vargas (private entity) in partnership with Caixa Economica Federal (public company), measures the cost of new housing in 18 cities: Aracaju, Belem, Belo Horizonte, Brasilia, Campo Grande, Curitiba, Florianópolis, Fortaleza, Goiânia, João Pessoa, Maceio, Manaus, Porto Alegre, Recife, Rio de Janeiro, Salvador, Sao Paulo and Vitoria. This is one of three items that comprise the IGP – General Price Index, with 10% weight. It is measured between the first and last day of the month and released about 20 days later. There is another number (INCC-M), calculated between day 21 of the previous month and the 20th of the month in reference for the composition of the IGP-M.

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Recent inflation information for brazil

Perspective for the Brazilian Inflation and interest rate moving forward