Brazil's Inflation Forecast and Economic Outlook

By Gabriel Burin

(Reuters) – Brazil's annual inflation is forecast to have reached a one-year high in October due to rising energy and meat prices from a severe drought, according to a Reuters poll.

Despite these challenges, Banco Central do Brasil (BCB) is expected to increase its interest rate by 50 basis points to 11.25% on Wednesday, in contrast to global peers who are easing monetary policy.

The IPCA inflation index, set for release on Friday, is anticipated to rise to 4.72% year over year, marking the highest level since October 2023 (4.82%), based on the median estimate from 18 economists polled between October 30 and November 4.

This rise signifies the first breach of the official inflation goal of 3% ± 1.5 percentage points since January. The monthly inflation rate is projected to be 0.53%, the fastest pace since February's 0.83%.

UBS analysts suggest that the highest contributor to inflation may be electricity prices due to increased household tariffs, and food prices could accelerate, especially for proteins, compared to September.

Although recent rains have improved agricultural and energy production conditions this month, the Southern Hemisphere is not entirely free from dry spells, alongside other inflationary risks.

Barclays analysts predict that the central bank may increase its benchmark interest rate to 12.75% in the first half of 2025 because of ongoing Brazilian real weakness, fiscal uncertainties, and inflation linked to climate shocks.

Imported goods and services costs have risen this year, partially due to a 16% drop in the value of the Brazilian real caused by investor concerns over a complicated budget situation.

To alleviate these fiscal concerns, the government is planning measures to limit spending, potentially imposing caps on health and education expenditures, which currently do not have the same restrictions.

Initial hopes regarding fiscal improvements during President Luiz Inácio Lula da Silva's term have diminished, as public spending poses ongoing challenges despite enhanced tax revenues, increasing long-term inflation expectations.

(Reporting and polling by Gabriel Burin; Editing by Peter Graff)