Financial market agents in Brazil increased their inflation expectations for the 20th week in a row, tipping the IPCA consumer price index to see out the year up 7.11 percent — according to the Central Bank’s weekly Focus Report.
What the Central Bank initially explained away as a temporary inflationary shock has now endured for over a year. Food prices were first to shoot upward before fuel prices became the new villain, soon joined by electricity bills. As a result of a widespread spike in living costs, some Brazilian households are resorting to using wood-burning stoves, and beef consumption has declined to its lowest level in 25 years.
Last week, Central Bank CEO Roberto Campos Neto promised to do “whatever it takes” to keep inflation within its target band — which maxes out at 5.25 percent for this year.
Despite the comments, financial institutions kept their perspective for interest rates unchanged from the previous week, pegging the Selic benchmark rate at 7.5 percent by the end of the year. That would be a 225 basis-point increase from the current 5.25 percent per year.
Over the past few weeks, interest rate curves have been influenced by the latest political crisis in the Jair Bolsonaro government, which could lead to a serious imbalance in Brazil’s public accounts. The most pressing issue is the potential default on government IOU bonds, known as precatórios. Without approving a measure to renegotiate these debts, the administration would be unable to boost cash transfer programs, seen as key to President Bolsonaro’s re-election chances in 2022.
The Brazilian currency has also felt the blow of the seemingly never-ending political crisis, losing 3 percent of value since the beginning of August. However, financial institutions believe the forex rate will end the year at BRL 5.10 : USD 1 — 5 percent above current levels.