Brazilian currency forecasts down for the first time in 16 weeks

Amid uncertainty around which fiscal anchors the next Brazilian government will adopt, investors have worsened their expectations for the country’s foreign exchange rate. 

According to Monday’s Focus Report — a weekly survey with top-rated investment firms — the market forecast the U.S. Dollar closing the year valued at BRL 5.25, up from BRL 5.20 a week ago. Estimates for 2023 and 2024 also worsened. At 11 am on Monday, the greenback traded at BRL 5.32.

Investors also raised their year-end inflation forecasts, from 5.6 percent a month ago to 5.88 percent on Monday. For next year, expectations went from 4.94 to 5.01 percent, breaking a month-long streak of stability.

With these estimates, official inflation would be above the upper limit of the target stipulated by the Central Bank — of 5 and 4.75 percent respectively — for both years. That means Brazil would be tipped to miss official inflation targets for three consecutive years.

The worsening of previously stable indicators is a direct result of the growing distrust of the market regarding the way President-elect Luiz Inácio Lula da Silva’s government will abide by fiscal responsibility (if at all) after promising measures that will increase spending next year.

Last Wednesday, for instance, Lula’s transition team presented a constitutional amendment proposal that would allow the new government to spend on social programs outside the federal spending cap. According to many economists, the bill would essentially give the new administration carte blanche to spend as much as it wants for as long as it wants.

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