The real interest rate in Brazil remains below 5% despite significant tightening as IPCA inflation rose to 9.5% yoy.
"It is difficult to predict if the current level of real interest rates is sufficient to bring inflation back to 4.5% by end-2016. We do subscribe to the view that real interest rates would be much higher in 2016 even if the Selic rate remains at current levels as inflation is expected to fall sharply in 2016 owing to the base effect and the rising unemployment rate", says Societe Generale.
However, heavy BRL depreciation and the possibility of stubbornness in nominal wages (despite labour market weakness) are the key upside risks to the 2016 inflation outlook. Moreover, food prices could continue to surprise to upside as they have done nearly every time in recent years.
"In fact, following the recent inflation releases, we revised down our 2015 inflation forecast to 8.8% but revised up 2016 and 2017 inflation forecasts to 6.6% and 5.8% (previously 9.0%, 6.5% and 5.5%, respectively)", forecasts SocGen.
