Market economists reduced their estimate for inflation by the Broad Consumer Price Index (IPCA) in 2017 and in the next 12 months, according to the average forecast in the Focus Bulletin, released on Monday by the Central Bank (BC) .
For this year, inflation bets were reduced from 3.03% to 2.88%, below the floor of the target for the calendar, of 3%. The center of the inflation target is 4.5%. In 12 months, the projection for the advance of prices increased from 3.96% to 3.91%. For 2018, the estimate was maintained at 4.02%.
Last Friday, the Brazilian Institute of Geography and Statistics (IBGE) reported that the IPCA slowed the rise to 0.28% in November, after rising 0.42% a month earlier.
The average estimate for economic growth had a new round of upward adjustments after the IBGE revised positively the Gross Domestic Product (GDP) figures for the first and second quarters of this year. Thus, the projections went from expansion of 0.89% to 0.91% in 2017 and advance from 2.60% to 2.62% in 2018.
For the basic interest rate, Selic, at the end of 2018, the projections were maintained at 7%
As expected by the majority of the economists, the decision of the Central Bank was to raise the SELIC to 14.25% per year. The 0.5% increase is the seventh in the tightening cycle started last october.
The raise was expected because the inflation is currently at the dangerously high levels, with the IPCA, the official inflation index at 8.89% inflation accumulated in the last 12 months. The reduction in the fiscal saving target from 1.1% of the GDP to 0.15% announced last week left the hard part of the inflation combat to the monetary policy.
The monetary committee indicated, however, that the SELIC will probably remain at this level in the next meetings. “The committee understands that the maintenance of this level for the interest rate benchmark for a period long enough is necessary to bring the inflation the the target at the end of 2016”, said the central bank in its note. The Brazilian inflation target is 4.5% per year plus or minus 2%, so from: 2.5% to 6.5%.
The Brazilian committee for monetary policy (COPOM) has raised the interest rate benchmark by 0.5% to 13.75% per year. The decision was unanimous and came without a direction indication and in line with expectations. Therefore, Selic is back to the level of december 2008.
In the note released with the decision, the committee suggests that it did not finish the credit tightening cycle, since it’s maintaining the text used since January: “Evaluating the macroeconomic scenario and the perspectives for the inflation, COPOM has decided to raise the Selic”.
Now, the analysts debate if in the next meeting in July, the rate of 0.5% increase will be maintained, if it will drop to 0.25% or even if the cycle may be extended until September. A better understanding of this direction will probably be possible after the minutes release Thursday of next week.
The real interest, when discounted the inflation, is at 7.3%. This same index was 2.4% in April, 2013.
COPOM is clearly trying to show to the markets that this time, its search to take the inflation back to 4.5% by the end of 2016 is real. Brazil has damaged its credibility in the last few years after continuous spending deficits and a monetary policy lenient to higher inflation.
Central bank’s job of controlling the inflation may be “helped” by a stronger than expected cooling of the economy. Unemployment rate has reached 8% in May. The cooling in the economy could take some of the pressure off of the prices.