Deeper recession, faster CPI, higher rate squeezing Brazil

By Money Times

Dec 16, 2015 12:45 AM EST

The Brazil's central bank will be under pressure to raise interest rate in 2016 amid gripped into the deepening recession. The borrowing cost is expected to rise by 0.25 percent next year. Brazil is suffering from rising inflation and easing productivity.

The typical economy situation is posing a major challenge to policy makers to address the problems in the economy.

The Brazil's economy is suffering worsening recession than anticipated. The latest survey by 100 economists carried out by the central bank, the interest rate is expected to go up from 14.25 percent to 14.5 percent in 2016. The rising borrowing costs will put more pressure on business. 

According to a report by Bloomberg, economists forecast the Brazilian economy will shrink by 2.67 percent in 2016 from 2.31 percent contraction in the previous year. The inflation rise coupled with drop in production is taking a toll on the Brazilian economy.

The commodity-driven boom in Brazil economy couldn't sustain since President Rousseff took charge in 2001. Rousseff was forced to cut down stimulus this year as she tried to rescue the federal budget. The recession resulted in the drop in tax revenues for the nation. 

According to a report by Reuters, the $1.5-trillion Brazilian economy eased 1.7 percent during the third quarter. The political situation is also weakening amid corruption scandal rocking the nation. In addition to this, the widening fiscal deficit has become a major cause of concern.

The contraction in the economy during the third quarter is higher than the forecast of 1.2 percent in a Reuter's poll of 33 analysts.

Brazil, which marks the first letter 'B' in acronym BRICS (Brazil, Russia, India, China and South Africa), was most attractive among the emerging economies. The largest Latin America nation is now facing a reverse situation. Inflation rate shooting over 10 percent and unemployment rose over 7.9 percent. 

CNBC has reported that President Dilma Rousseff was facing turbulent situation amid a corruption scandal, low poll numbers, surge in inflation and unemployment. Global rating agencies have started cutting down ratings on the Brazilian economy. 

Brazil's President Dilma Rousseff-led government is taking all the possible measures to check inflation and enhance economy output. Brazil is moving towards to contraction for two years for the first time since 1931, according to Brazilian government's economic research institute. The outlook for the economy is changing.

Economists forecast 6.8 percent inflation for 2016 this is higher than the previous prediction of 6.7 percent.

Brazilian central bank's target to bring inflation down to 4.5 percent by 2017. In the latest meeting held during 24-25 November, the central bank held the Selic rate at 14.25 percent, which is highest since 2006. Brazil is witnessing worsening uncertainty in political and economic aspects. This situation is further threatening control measures on consumer prices for a long.

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