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Fitch: Lower Brazil Inflation Target Helps Anchor Expectations
July 5, 2017 / 2:18 PM / 5 months ago

Fitch: Lower Brazil Inflation Target Helps Anchor Expectations

(The following statement was released by the rating agency) LONDON/NEW YORK, July 05 (Fitch) Brazil's lower inflation target should help anchor medium-term inflation expectations as the Central Bank of Brazil's inflation-targeting gains credibility, Fitch Ratings says. This should support macroeconomic adjustment and a recovery in growth. Brazil's National Monetary Council (CMN) last week cut the inflation target for 2019 to 4.25% and for 2020 to 4.0% from 4.5%, while leaving the +/?1.5% tolerance range unchanged. This is the first change in the target since 2005. The CMN, which consists of the ministers of finance and planning and the central bank governor, also said that next year it would start setting the inflation target three years in advance. The CMN's decision comes after inflation dropped below target for the first time since 2010. Food price deflation, exchange rate stability, and falling services inflation contributed to IPCA inflation falling to 3.6% in May. In our most recent Global Economic Outlook, published on 19 June, Fitch trimmed its year-end inflation forecasts for Brazil to 4.2% from 4.8% for 2017, and to 4.5% from 4.6% for 2018. Our 2019 forecast is also 4.5%. These forecasts could be brought down further as lower inflation targets set by CMN help reinforce lower inflation expectations. Lowering the target should help further anchor medium-term inflation expectations, underpinning greater macroeconomic stability. The fall in inflation expectations has enabled the central bank to step up monetary easing, cutting its key rate to 10.25% in May from 14.25% a year ago. We expect the policy rate to fall to the single digits this year. We expect monetary easing and real wage gains to support a demand-led recovery. Our latest forecasts see real GDP rising by 0.5% this year following a 3.6% contraction in 2016, with growth accelerating to 2.5% next year. Our 2019 forecast, published for the first time in the June Global Economic Outlook, is 2.7%. External adjustment has narrowed the current account deficit while international reserves remain strong, providing a buffer to possible domestic or external shocks. However, downside risks to our growth forecasts remain given the fluid and challenging political environment and stalling reform agenda. Moreover, high unemployment and household debt and private-sector deleveraging could also weigh on the recovery. Political uncertainty has increased in recent weeks, given corruption-related allegations against President Temer. These developments are undermining the prospects for fiscal reforms, especially the social security reform, which is key to making the public spending cap approved in December effective and credible over time. The recovery in business and consumer confidence indicators following last year's transfer of power has proved uneven, and the approach of presidential and congressional elections due in 2018 could reduce the political window to pursue reforms. Even as it accelerates, Brazil's recovery will be subdued relative to its ratings peers. Our latest forecasts show that Brazilian real GDP growth will be around 1pp lower than the 'BB' category median in 2018-2019. Weak growth prospects are a ratings weakness for Brazil, as we noted when we affirmed its 'BB'/Negative sovereign rating in May. Declining inflation and better anchoring of inflation expectations support the rating. Fitch's global and country-by-country GDP, inflation, interest-rate and exchange-rate forecasts and related commentary are contained in our Global Economic Outlook, available at or by clicking on the link. Contact: Shelly Shetty Senior Director, Sovereigns +1 212 908-0324 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Todd Martinez Director, Sovereigns +1 212 908-0897 Mark Brown Senior Analyst, Fitch Wire +44 203 530 1588 The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at All opinions expressed are those of Fitch Ratings. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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