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No Good News from Banco Central do Brasil for Inflation in Brazil

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Inflation in Brazil

Brazil’s 12-month IPCA consumer price index slowed to 10.36% in February, the first decline since September 2015. However, it remained firmly in the double-digit territory. This may be an early sign of inflation slowing in Brazil.

The Copom, which is the rate-setting group of the Banco Central do Brasil, kept the interest rate unchanged earlier in March in hopes that inflation would decline after peaking early in the year. The high rate of inflation has been detrimental to household spending in Brazil. Coupled with a receding economy, it has resulted in stagflation. On a month-over-month basis, the prices of food and housing grew more slowly than in January.

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Inflation and economic growth projections

In its quarterly inflation report, the Banco Central do Brasil projected that inflation measured by Broad National Consumer Price Index (or IPCA) could be 6.6% in 2016. In December’s report, the central bank had expected inflation to be 6.2% in 2016. The bank’s baseline projection assumes a constant exchange rate over the forecast horizon at 3.70 reais per dollar and the target for the Selic interest rate at 14.25% per year. It expected inflation to be 4.9% in 2017, marginally higher than the 4.8% projected in December.

The bank also informed that inflation expectations, according to its survey, placed the pace of price growth at 6.9% in 2016 and 5.4% in 2017. The central bank noted that “monetary policy can, should, and … is” curbing the ill effects of high inflation like the decline in household and business confidence, pressure on economic growth, and a reduction in the purchasing power of wages, among others.

The outlook for economic growth was quite somber. The Banco Central do Brasil expected Brazil’s economy to decelerate by 3.5% in 2016, down from a -1.9% pace expected in the December report.

This outlook is sufficient to show the level of negativity associated with Brazil’s economic future in the near term. So, it does not seem like the ideal time to invest in actively managed funds investing in Brazil (UBPIX) (ALEAX), and investors may want to wait this troublesome period out. The surge in Brazilian equities (BRFS) (UGP) (CBD) has no backing of economic fundamentals.

Because mutual funds focus on the entire Latin American region, these funds are invested in a big way in Mexican equities as well. Let’s take a brief look at the state of affairs in Mexico in the next article.

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