The statement underscored that inflation developments remain favorable, as inflation expectations for 2017 fell to around 3.3 percent (vs 4.0 in May of 2017). The Copom views the heightened uncertainty regarding the speed of the process of reforms and adjustments in the Brazilian economy as the main risk factor, yet underscored that that the global outlook has been favorable and that changes in economic policy in some central economies have become less likely.
The central bank started its easing cycle in October last year after the inflation rate eased from double digits. Inflation slowed faster than expected in the past seven months due to subdued economic activity and a stronger real. Consumer prices in Brazil increased 3.0 percent year-on-year in June of 2017, below 3.6 percent in May and in line with market expectations of 3.06 percent. It was the lowest inflation rate since April of 2007, due to a slowdown in cost of food and a fall in electricity prices. The inflation rate slowed for the tenth straight month to the lowest since July of 2007, standing below the central bank target of 4.5 percent for the first time since December of 2009.
Still, the economic recovery is taking longer than initially expected, with mixed economic data clouding the horizon. Industrial Production in Brazil increased 4 percent in May of 2017 over the same month in the previous year, booking the highest annual gain since February of 2014. Contrastingly, the seasonally adjusted IHS Markit Brazil Manufacturing PMI fell to 50.5 in June 2017 from 52 in the previous month and below market consensus of 51. Moreover, Brazil's consumer confidence came in at 100.5 in June of 2017, barely unchanged from 100.6 in May, as political scandals and uncertainty continue to weigh. The median estimate in a central bank poll of economists currently points to growth of 0.34 percent in 2017 (vs 0.49 percent back in May of 2017) and 2.00 percent in 2018 (vs 2.48 percent). Analysts expect the Selic rate to end 2017 at 8.00 (vs 8.50 percent).