Brazil real interest rates to be much higher in 2016

Meanwhile, the real interest rate remains below 5% despite significant tightening as IPCA inflation rose to 9.57% yoy through mid-August. It is difficult to predict if the current level of real interest rates is sufficient to bring inflation back to 4.5% by end-2016. 

"The real interest rates would be much higher in 2016 even if the Selic rate remains at current levels as inflation is expected to fall sharply in 2016 owing to the base effect and the rising unemployment rate". 

However, heavy BRL depreciation and the possibility of stubbornness in nominal wages are the key upside risks to the 2016 inflation outlook. Moreover, food prices could continue to surprise to upside as they have done nearly every time in recent years. 

"In fact, 2016 inflation forecast is raised to 6.5% (a full percent point above the consensus). In any case, inflation expectations have generally been found to have downward biased almost consistently for quite a few years", added Societe Generale.