Running Out Of Options

BRAZIL ECONOMICS - Report 09 Sep 2024 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

In its last Copom meeting, the Central Bank forecasted inflation at 3.2% in the 12-month period to March 2026, assuming an unchanged policy rate. Since then, economic activity has been stronger than expected, accelerating in the second quarter, while the unemployment rate and capacity utilization are close to the levels recorded in 2014.

If the GDP surprise were fully incorporated into the output gap estimate, BCB’s model would indicate that a 2 percentage points monetary tightening would be required for inflation forecasts to reach the center of the target in the relevant horizon. That said, our projections indicate that even a Selic rate close to 12.5% would be insufficient to bring inflation towards the target within the Central Bank's relevant horizon.
INFLATION TARGET COMPROMISED - 12-month inflation measured by the IPCA is at the upper limit of the target (4.5%) and is expected to reach around 4.3% by the end of the year, according to the Focus survey.

Additionally, average core inflation stands at 3.7%, while core services inflation has been above 4.5% since 2021, in both cases suggesting a persistent inflationary process. Economic activity and the labor market are expected to keep inflation under pressure and remain an obstacle to the convergence of inflation to 3% within the Central Bank’s relevant horizon of six quarters ahead.

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