Sep 27 2016
Will inflation expectations drop below 5%?
By | Brasília
Ever since he took office, in June, Central Bank President Ilan Goldfajn managed to lower the financial market’s inflation expectations to 5.07% from 5.5%, according to data released Monday morning. The question now is whether inflation expectations will actually drop below 5%.
During the tenure of Alexandre Tombini, 5.5% were seen as a kind of floor for expectations because many economic analysts considered it the effective goal pursued by the former central banker.
The market only believed that Mr. Tombini might be aiming for an inflation lower than 5.5% in the relevant monetary-policy horizon during two occasions: early in 2012, when he made deep cuts to policy rate Selic, and in the first half of 2015, when the former central banker went through a more hawkish cycle.
The Ilan effect – as the central banker is widely known – improved the Central Bank’s credibility and allowed inflation expectations to fall below 5.5%. But progress has been more modest recently, with expectations staying more or less stable at around 5.12%.
Expectations fell again this week to 5.07% from 5.12%. The progress largely reflects a positive surprise from the Extended Consumer Price Index-15 (IPCA-15, which measures inflation in the first half of the month), released last week, in addition to the renewed trend of currency gains against the dollar after uncertainties regarding an interest-rate hike in the US ebbed.
The big question, however, is whether expectations will continue falling, especially after the BC indicated that as time passes 2017 will become a less important target for its inflation-management strategy. The focus, he indicated, would be moving to the first quarter of 2018.
Inflation’s leading indicators still don’t allow a definitive response on whether expectations can really drop below 5%. The average forecast of economic analysts fell slightly to 5.15% from 5.18%. But the average remains higher than the median. The so-called medium term Top 5, the group of analysts whose forecasts are more accurate, so far doesn’t indicate a trend below 5%.
Their forecast still average 5.55%, a very high percentage that is still consistent with how inflation targets were perceived during most of the Tombini tenure. More substantial expectation declines will depend on an improvement in economic fundamentals, like Congress approving the fiscal reforms. Yet many analysts probably are waiting for the Inflation Report, set for release this Tuesday, to check the Central Bank’s degree of commitment to the 2017 target before forecast next year’s inflation.