Latin America’s largest economy will grow by 1.3 percent next year, compared to a forecast of 1.23 percent expansion the week prior and 1.1 percent a month ago, according to a central bank survey of about 100 analysts published Monday. Economists lowered their year-end 2017 forecasts for the benchmark Selic rate to 11 percent from 11.25 percent a week ago.
Brazil is seeing increasing amounts of optimism since ousting former president Dilma Vana Rousseff on August 31. Her impeachment marked the end of several months of legal battles and many years of the country’s rule by its Workers Party.
Brazil is showing early signs of a recovery after falling into one of its worst recessions on record. Industrial production has expanded for five straight months on the back of both rising business and consumer confidence. Investors are hoping that President Michel Temer will pass reforms to support an economy that over the past two years has been battered by an unprecedented corruption scandal and a crippling political crisis.
Recovery in Brazil will be a long road, however. Central bankers are struggling with the timing of a potential interest rate cut, which can’t happen until inflation begins to come under control. The country is currently seeing inflation levels approaching 10%, which hurts consumers and makes lowering interest rates almost impossible.
The central bank kept the Selic at a 10-year high of 14.25 percent last week, indicating that borrowing costs will only fall when policy makers are more confident that inflation will hit the 4.5 percent target in 2017. Central bank directors tweaked the language of their post-meeting statement, dropping a sentence that said there was “no room” for monetary easing.
Investors have flocked to Brazilian stocks in droves this year, intrigued by the prospect of an economic recovery for such a large nation. So far, the share price gains have exceeded the actual recovery itself, leading many to question if the rally is a case of too much too soon.
The largest Brazil-focused ETF, EWZ was inactive Monday with the Labor Day holiday in the United States. EWZ has gained 66% year-to-date.