Brazil economists lowered their forecast for the benchmark Selic rate for the first time in four months as the currency appreciated further amid speculation President Dilma Rousseff will be ousted.
Economists lowered their Selic forecast to 13.75 percent at year-end 2016, from 14.25 percent previously, and also its current level, according to the weekly Focus survey conducted April 1. They also slashed their forecast for the currency to 4 reais per U.S. dollar at year-end, down from 4.15 the prior week.
Inflation has finally begun slowing following a sharp acceleration throughout all of 2015 as pressure from increases in government-regulated prices faded.
With the real at its strongest since August, analysts are betting inflation will slow further. Brazil’s central bank said in its quarterly inflation report, however, that it sees no room for lowering the Selic, even as the monetary authority nearly doubled its estimate for this year’s recession.
Inflation that has returned to single digits remains at more than double the government’s target, and that’s weighing on consumer sentiment needed to fuel a recovery in demand. Business confidence has also stayed near record lows, weighing on investment. The economy will contract 3.5 percent this year, according to the central bank’s report released March 31, which marked a stark downward revision from its December call for a 1.9 percent plunge.
Economists the bank surveys are even more pessimistic; they forecast the economy will sink 3.73 percent this year, down from 3.66 percent previously. That would make 2015 and 2016 the first time in more than a century that the economy shrank more than 3 percent for two straight years, according to government economic research institute IPEA.
Even with the economy mired in recession, the currency this year has gained most among 31 major currencies tracked by Bloomberg as the market ascribes greater probability to Rousseff’s impeachment.
With the currency strengthening and inflation expectations falling, the market for weeks has been betting the central bank will reduce the Selic rate by a full percentage point.