20171016-法国巴黎银行-Brazil__Again_at_3_-handle_inflation_8页_555kb

Brazil: Inflation Forecast Revised to 3.5% for 2018

Core Content

This document provides an updated inflation forecast for Brazil for the year 2018, revised from 4.0% to 3.5%. The analysis is based on economic trends, regulatory mechanisms, and global factors, particularly in the agricultural and financial sectors.

Main Points

• Inflation Forecast Revision:
  The inflation forecast for Brazil in 2018 has been reduced by 0.5 percentage points to 3.5%, reflecting the ongoing disinflationary trend and the influence of various factors on price dynamics.

• Services and Regulated Prices:

  • Services inflation is expected to decline significantly, from 4.7% in 2017 to 3.8% in 2018.
  • Regulated prices are also projected to rise modestly, from 7.0% in 2017 to 3.8% in 2018, due to the effectiveness of inertia mechanisms and good management of these prices.

• Food Prices:

  • Food prices are expected to show a slight increase in 2018, from -3.0% in 2017 to 4.4% in 2018, driven by a mild recovery in food prices.
  • The record grain harvest in 2017 helped keep food prices in check, and while production is expected to remain slightly below 2017 levels, this should limit inflationary pressures.
  • Weather and supply changes pose a natural risk to these projections, particularly for fruits and vegetables.

• Inflation Expectations:

  • Inflation expectations have become more anchored and are now in line with the central bank's target.
  • The central bank's credibility and the lower inflation targets for 2019 and 2020 (4.25% and 4.00%) may lead to lower and stable inflation expectations in the future.

• Minimum Wage Adjustment:

  • The minimum wage in January 2018 will be adjusted by less than 3.0%, reflecting lower inflation and modest GDP growth.
  • The INPC index, which is used for wage adjustments, is at 1.63%, compared to 2.54% for the IPCA index, indicating a more moderate impact on regulated prices.

• Fuel and Electricity Prices:

  • Fuel prices are aligned with international levels, reducing the likelihood of significant increases.
  • Electricity prices are expected to remain stable due to the current "flag" system, which allows for adjustments based on production costs.

Key Drivers of Inflation

Economic Outlook

• The Brazilian economy is on an upward trend, having recovered from eight quarters of contraction.
• However, it is still below potential growth, and it may take many quarters to return to full capacity.
• GDP growth is forecasted at 3.0% for 2018, which is expected to not drive inflation due to the low growth rate and inertia in pricing.

Risks and Caveats

• Natural risks in food supply due to weather and crop conditions.
• Inertia mechanisms may have both positive and negative effects, depending on the context.
• Inflation expectations are now stable but may shift if the central bank's credibility is challenged.
• Market volatility and transaction risks are inherent in financial instruments discussed.

Legal and Regulatory Information

• This document is a marketing communication and not investment research.
• It is non-independent research and intended for professional clients and relevant persons.
• BNP Paribas may have financial interests in the securities mentioned, and conflicts of interest may arise.
• The document does not constitute investment advice or a prospectus.
• Performance data is for illustrative purposes only and not guaranteed to reflect future outcomes.
• ETFs and options discussed are subject to specific legal and risk disclosures, and restricted securities may not be available to all investors.

Conclusion

The document concludes that Brazil's inflation is expected to remain low and stable in 2018, driven by services and regulated price deflation, a mild recovery in food prices, and anchored inflation expectations. The economic recovery is expected to be gradual, and the inflationary pressures will remain subdued due to the inertia mechanisms and below-potential growth.