Macroeconomic Forecast Brazil

Consumer price inflation in Brazil continued to move towards the central bank's 4.5% y-o-y inflation target, coming in at 4.8% y-o-y in June. Although we believe that the decline in economic activity has petered out and we will see the economy gradually pick up towards the end of 2009, we are not worried that recent monetary easing will foster an uptick in inflation. Indeed, even with interest rates in the single digits for the first time on record, we see scope for consumer price inflation to continue falling towards our end-year target of 3.8%, as Brazil's output gap remains wide. As such, we hold to our view that single-digit interest rates are here to stay.

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