Inflation Outlook

Luiz Awazu Pereira da Silva

Inflation Report June 2015

2 2

I. Main Message

II. International Environment

III. Financial Conditions

IV. Activity

V. Inflation Developments

Index

3

I. Main Message

• Monetary Policy is and will remain vigilant to ensure the convergence of inflation to the 4.5% target at the end of 2016

• Inflation is high in 2015; the Monetary Policy Committee (Copom) reiterates the need for determination and perseverance in the fight against inflation in the short, medium and long term

4

• Macroeconomic adjustment is standard and necessary: it is important to perseverate with fiscal and monetary policies in progress

• Initial reduction of unbalances with double adjustment of relative prices (regulated and external); improvement in current account

• Efforts to strengthen fundamentals should continue, to prepare for the external monetary normalization; and to build a solid base for a new cycle of sustainable growth

First Results in 2015 Show Transition

5 Sources: BCB and IBGE

Relative Price Adjustment: Regulated vs. Market %

in 1

2 m

on

ths

8.5

14.1

6.8

0

3

6

9

12

15M

ay 0

4

Nov 0

4

May 0

5

No

v 0

5

May 0

6

Nov 0

6

May 0

7

Nov 0

7

May 0

8

Nov 0

8

May 0

9

Nov 0

9

May 1

0

Nov 1

0

May 1

1

Nov 1

1

May 1

2

Nov 1

2

Ma

y 1

3

Nov 1

3

May 1

4

Nov 1

4

May 1

5

IPCA

IPCA - Regulated

IPCA - Market

IPCA Regulated Market 2013 5.91 1.54 7.29 2014 6.41 5.32 6.72 exp. 2015* 8.97 14.50 6.55 exp. 2016* 5.50 5.90 5.33

*median of market expectations on 6/19

6 Sources: BCB and Bloomberg

Relative Prices Adjustment: Exchange Rate R

$/U

S$, e

nd

of

mo

nth

60

80

100

120

140

160

180

1.0

1.5

2.0

2.5

3.0

3.5

4.019

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

R$/US$ REER DXY

R$/US$ and DXY through June (6/19), REER through May *median of expectations on 6/19 (end of period)

Jun

94

=10

0 (

REE

R),

Mar

73

=10

0 (

DX

Y)

Nominal Exchange Rate (R$/US$) 2013 2.34 2014 2.66 expectation 2015* 3.20 expectation 2016* 3.40

7 7

• The double relative prices adjustment (regulated and external) impacted inflation in 1Q 2015, increasing 12-moth accumulated inflation

• The objective of monetary policy is to avoid this impact to be transmitted to 2016 and beyond

• Monetary policy can and should contain the second-round effects, to circumscribe them to 2015

• For this reason, monetary policy should remain vigilant to ensure the convergence of inflation to the 4.5% target at the end of 2016

Price Adjusments Impact 2015 Inflation

8

100 100

50 50

30 25

0 0 0

20

40

60

80

100

120

201

7

201

8

201

9

IR4Q14

IR1Q15

Jun 19th

Source: BCB (Focus)

Market Expectations Deviation in Relation to 4.5% bps

In the Medium-Long Term (2017,2018 and 2019): Anchorage

Deviation

25bps

Deviation

0 bps Deviation

0 bps

9 Source: BCB (Focus)

Market Expectations Deviation in Relation to the Target bps

In the Short Term (2016): Progress has not been enough yet

120

110

100

0

20

40

60

80

100

120

140

2016

IR4Q14

IR1Q15

Jun 19th

10 Source: BCB (Focus)

Market Expectations Deviation in Relation to 4.5%

Inflation Expectation for 2017: Top 5 x Aggregate

bps

50

100

9

50

0

25

0

20

40

60

80

100

120

To

p 5

MT

Aggre

gate

IR4Q14

IR1Q15

Jun 19th

Top 5 MT* for 2017 anchored at the 4.5%

target

*Median of expectations of the Top 5 institutions (Medium Term ranking)

11 11

Inflation Report Projections for Inflation

Source: BCB (IR)

• Inflation projections show stability for 2016, despite the increase for 2015

6.0

4.9

7.9

5.1

9.0

4.8

0

2

4

6

8

10

201

5

201

6

IR4Q14IR1Q15IR2Q15

%

IR Projections - IPCA

12

0

5

10

15

20

25

30

35

40

45-0

,2

0,2

0,6

1,0

1,4

1,8

2,2

2,6

3,0

3,4

3,8

4,2

4,6

5,0

5,4

Dec 31stMar 31stJun 19th

median: 340 bps

median: 259 bps re

lati

ve f

req

ue

ncy

(%

)

median: 93 bps

Source: BCB (Focus)

Distribution of 2016 vs. 2015 Disinflation

upper limit of each interval

Differences between 2015 and 2016 IPCA Expectations (Focus) Distribution of Frequencies

stronger 2016 disinflation

13 13

Convergence to the Short and Medium-Long Terms

Source: BCB (Focus)

Intensification of the relative prices adjustment

Macroeconomic policy acting in the medium and long term expectations

Annual IPCA inflation expectations (Focus median)

2015 2016 2017 2018

Jan 2nd 6.56 5.70 5.50 5.50

Jun 19th 8.97 5.50 4.75 4.50

change 2.41 p.p. -0.20 p.p. -0.75 p.p. -1.00 p.p.

2019

5.00*

4.50

-1.00 p.p.

*on Jan 12th, first available data

14 14

• Impact of price realignments to be circumscribed to 2015; the path of 12-month accumulated inflation will have significant reduction in the 1Q 2016

• Transmission of relative prices adjustment happens with the beginning of labor market distension

•Decrease of intensity of the adjustment passthrough in the current cycle phase

• Fiscal Policy contributes for containing demand

•Moderation of credit and reduction of subsidies

Risk Balance for 2016 Inflation (1)

15 15

• Process in progress is normal; adjustments may occur as a combination of quantity and price

• Return of young and aged people tends to contribute for increasing productivity in the services sector

• Higher competition may favor adequation of wages and productivity; higher return on “years of education” creates incentives to improve human capital and productivity

Risk Balance for 2016 Inflation (2)

Beginning of Labor Market Distension

16 Sources: IBGE and Caged

Labor Market: Signs of Distension

Internannual change of the 3-month moving average

%

0

1

2

3

4

5

Ma

y 1

3

Au

g 1

3

No

v 1

3

Fe

b 1

4

Ma

y 1

4

Au

g 1

4

No

v 1

4

Fe

b 1

5

Ma

y 1

5

Caged

formal PME

total PME

-2

-1

0

1

2

3

Ap

r 1

2

Ju

l 12

Oct 1

2

Ja

n 1

3

Ap

r 1

3

Ju

l 13

Oct 1

3

Jan 1

4

Ap

r 1

4

Ju

l 14

Oct 1

4

Ja

n 1

5

Ap

r 1

5

Occupied Population

Economically Active Population

Population Real Earnings

Caged: through May 2015; PME: through April 2015

17 17

Inflation Persistence from Sectoral Shocks

• Seeks to identify the existence of differentiated behavior in the inflation propagation stemming from specific sectors

Boxes: Inflation Persistence and Models Revision

Response of Headline Inflation to Shocks in Different Sectors*

% in 4

qu

art

ers

• The results indicate differences in inflation dynamics, with higher inflation spillover in the industrial products and lower for regulated prices, suggesting lesser degree of persistence for headline inflation this year

* Shocks with 1 p.p. effect in headline IPCA

0

1

2

3

4

1 2 3 4 5 6 7 8 9

10

quarter

household food regulated prices

industrial products services

18 18

• 1st phase: adjustment impacts quantities (e.g., activity); non-economics events are overlapping in the process; strong fall in investment attenuated output gap widening

• 2nd phase: adjustment impacts prices (e.g., inflation); recent inflation resilience is overlapping in the process

• 3rd phase: better results signal a horizon of stability for the agents (inflation at the 4.5% target, anchored in the short, medium and long terms)

• Consolidation of adjustment process requires determination and perseverance

2015 is a Year of Standard Macroeconomic Adjustment

19 19

• After the 3rd phase, the reduction of imbalances improves fundamentals and perception: increases agents confidence, favors their planning and “animal spirit” of investors

• Adjustments contribute to change demand composition and to favor investment, which increases potential output and productivity

• Strong domestic market with “low hanging fruits”, and investment opportunities still present

Situation in 2016 Should Be of Resumption

20 20

• Better contribution of monetary policy to this virtuous cycle and more growth is to bring inflation to the 4.5% target at the end of 2016 and to anchor expectations in the medium-long terms

Situation in 2016 Should Be of Resumption

21

II. International Environment • Waiting for the interest rate normalization by

the Fed; in this context, global strengthening of the dollar with improvement in the US; even with better preparation, volatility is possible

• Process of commodities prices moderation; better environment and reduction of our current account deficit

22 Source: IMF

Falling Commodities Prices in

dex

(2

00

5 a

vera

ge=1

00

)

Commodities Index and subindices calculated by the IMF

0

50

100

150

200

250

300May…

May…

May…

May…

May…

May…

May…

May…

May…

May…

May…

May…

May…

May…

May…

May…

Commodities Prices IndexFoodMetalsEnergy

23 Source: Bloomberg

US Dollar Apreciation is a Trend (but there is Vol)

Data through June 19th; *dollar index: measures the international value of the dollar against basket of the six main reserve currencies in the world (Swiss franc, Canadian dollar, Japanese yen, pound sterling, euro and Swedish kron)

ind

ex (

21

/5/1

3=1

00

)

75

80

85

90

95

100

105

110

115

120

Jun 1

3

Aug 1

3

Oct 1

3

Dec 1

3

Fe

b 1

4

Apr

14

Jun 1

4

Aug 1

4

Oct

14

Dec 1

4

Fe

b 1

5

Apr

15

Jun 1

5

Dollar index*

Index of 20 emerging currencies

Euro

Yen

24 24

• Risk aversion at low level, with episodes of volatility, (e.g., sovereign bonds of mature economies); possible currency volatility (e.g., dollar strenghtening)

• With the uneven recovery process of the G3 economies, respective central banks undertook asymmetrical monetary policy actions

• Risks for global financial stability still tend to remain high

Retrospective – Abroad (since 1Q 2015)

25 25

• Throughout the relevant horizon for the monetary policy, prospects for more intense global activity pace (e.g., improvement in the US, QE in Europe and in Japan)

• Tendency to reduction of oil and commodities prices suggests contained global inflation in 2015 and 2016; in spite of a recent advance of metal and energy commodities prices, reduction in the segment of agricultural products

Prospects – Abroad 2015-2016

26 Source: IMF (WEO Update, April 2015)

Global Economy in Gradual Recovery %

an

nu

al G

DP

gro

wth

4.7

2.4

3.8

-4

-3

-2

-1

0

1

2

3

4

5

6

7

8

9

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015*

2016*

Emerging

Advanced

World

*estimates

27

65

70

75

80

85

-6

-4

-2

0

2

4

6

GDPCapacity Utilization

100

110

120

130

140

150

Mar

95

Mar

97

Mar

99

Mar

01

Mar

03

Mar

05

Mar

07

Mar

09

Mar

11

Mar

13

Mar

15

Sources: U.S. BEA; Federal Reserve and U.S. BLS

Economic Recovery in the US

% o

f th

e t

ota

l (s.

a.)

% q

/q-4

nonfarm payroll employment (seasonally adjusted)

mill

ion

28 Source: Bloomberg

Europe – Growth and Inflation Yo

Y %

, s.a

.

GDP Growth – Euro Area Consumer Inflation – Euro Area

% in

12

mo

nth

s

0.30

-1

0

1

2

3

4

Ma

y 0

7

Ma

y 0

8

Ma

y 0

9

Ma

y 1

0

Ma

y 1

1

Ma

y 1

2

Ma

y 1

3

Ma

y 1

4

Ma

y 1

5

1.00

-6

-5

-4

-3

-2

-1

0

1

2

31Q

08

3Q

08

1Q

09

3Q

09

1Q

10

3Q

10

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

1Q

15

29 Source: Bloomberg

China – Gradual Deceleration Yo

Y %

6

7

8

9

10

11

12M

ay 1

0

Nov 1

0

May 1

1

Nov 1

1

May 1

2

Nov 1

2

May 1

3

Nov 1

3

May 1

4

Nov 1

4

May 1

5

GDP Leading Indicator

Real GDP Growth

30 30

• Advanced economies in different positions in the economic cycle. US already consolidating the resumption of economic growth

• Deflation risks have increased since the 2nd half of 2014, particularly in the Euro Area and Japan; at the margin, this risk has decreased

• Monetary policies at distinct moments: Fed has already ended the Asset Purchase Program, ECB and BoJ in the midst of this process. Fed signals the likely beginning of tightening cycle in its benchmark rate

• Stronger growth in the US and prospects of higher fed fund rates favor the appreciation of the dollar. Dollar Index appreciated 18.4% between July 2014 and July 10, 2015

• Recent increases in 10-year bond yields in the US and Germany. But current stance of monetary policy in Europe and Japan tends to be a downward bias to the slope of the yield curve in the US

Box: G3 Monetary Policy

31 Source: Bloomberg

Divergence in Monetary Policy %

10-year Bonds

0

1

2

3

4

5

6Jun 0

5

Jun 0

6

Jun 0

7

Jun 0

8

Jun 0

9

Jun 1

0

Jun 1

1

Ju

n 1

2

Jun 1

3

Jun 1

4

Jun 1

5

Japan

US

Euro Area

32 Fonte: Bloomberg

Volatility

data up to June 19th

% p

.y.

% p

.y.

VIX and Volatility in Securities Markets

Currency Volatility

bp

s

40

50

60

70

80

90

100

110

120

10

20

30

40

50A

ug

12

Oct 1

2

Dec 1

2

Feb 1

3

Apr

13

Ju

n 1

3

Aug

13

Oct 1

3

Dec 1

3

Feb 1

4

Apr

14

Ju

n 1

4

Aug

14

Oct 1

4

Dec 1

4

Fe

b 1

5

Apr

15

Ju

n 1

5

VIX

MOVE

5

10

15

20

25

30

Aug

12

Oct 1

2

Dec 1

2

Fe

b 1

3

Apr

13

Ju

n 1

3

Aug

13

Oct 1

3

Dec 1

3

Fe

b 1

4

Apr

14

Ju

n 1

4

Aug

14

Oct 1

4

Dec 1

4

Fe

b 1

5

Apr

15

Ju

n 1

5

BrazilIndiaSouth Africa

33 33

Revision for 2015 shows signs of ongoing improvement:

• The macroeconomic adjustment in progress allowed the current account deficit estimate reduction, from $84 billion to $81 billion (4.2% of GDP). In 2014, the current account deficit reached US$ 104.8 billion (4.5% of GDP)

• The estimate maintains a US$3 billion trade surplus, accompanied by further contraction in trade flows. Estimates for exports and imports were reduced in $10 billion each to $200 billion and $197 billion respectively

• The decrease in the projected services account deficit was mainly due to lower expected expenses on trips (US$ 1.5 billion reduction) and transport (US$ 1 billion reduction)

• The profits and dividends projection was reduced by $1.5 billion to $21 billion, against $31.2 billion in 2014

• In the financial account liabilities, direct investment estimates ($80 billion) and rollover rate (100%) have been maintained, while the net inflow of stocks and investment funds was increased from $13 billion to $15 billion

Box: Projections for the Balance of Payments

34

•Normalization is complex; Fed lift-off after tapering is the most expected, well announced and prepared event

• Perceptions about Brazil are evolving; positive effect of macroeconomic adjustment; no “perfect storm”; but, despite perception improvement, it is fundamental to continue the adjustment process

•We have to keep macroeconomics in order and stabilized for the lift-off; using standard receipt: reinforce monetary policy stance, keeping solid fundamentals

External Summary: Preparation for Fed Lift-Off

35

III. Financial Conditions

• Moderation in the pace of credit concession consistent with adjustment and cycle

• Robustness and liquidity of the National Financial System remain and ensure financial stability

36

25.6 25.8 24.3 25.5

28.0 30.4

34.7

39.7 42.7

44.1 46.5

50.3 52.6

54.7 54.4

0

10

20

30

40

50

602

00

1

200

2

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

20

14

201

5*

Source: BCB

Credit/GDP Ratio %

of

GD

P

new methodology as of 2011; *May 15

2009-2014: 16.1% (average nominal growth)

2005-2008: 25.4% (average nominal growth)

37 Source: BCB

Credit and Delinquency

Expansion of Credit Outstanding

Delinquency

%

% c

han

ge in

12

mo

nth

s

3.0

2.7

2.9

3.1

3.3

3.5

3.7

3.9

Se

p 1

1

Ja

n 1

2

Ma

y 1

2

Se

p 1

2

Ja

n 1

3

Ma

y 1

3

Se

p 1

3

Ja

n 1

4

Ma

y 1

4

Se

p 1

4

Ja

n 1

5

Ma

y 1

5

10.1

10

12

14

16

18

20S

ep

11

Jan 1

2

Ma

y 1

2

Se

p 1

2

Ja

n 1

3

Ma

y 1

3

Se

p 1

3

Ja

n 1

4

Ma

y 1

4

Se

p 1

4

Ja

n 1

5

Ma

y 1

5

38 Source: BCB

Declining Household’s Debt

% o

f th

e in

com

e

% o

f th

e an

nu

al in

com

e

18

19

20

21

22

27

28

29

30

31

32A

pr

10

Oct 1

0

Apr

11

Oct 1

1

Apr

12

Oct 1

2

Apr

13

Oct 1

3

Apr

14

Oct 1

4

Apr

15

Debt ex-housing (LHS)

Debt service ex-housing (RHS)

39 Source: IMF (FSI – last available data)

Financial Soundness Indicators

12.4

12.5

12.5

13.7

14.2

14.2

14.4

14.6

15.0

15.3

15.4

15.8

15.9

16.6

16.7

18.0

0 5 10 15 20

Australia

India

Russia

Spain

Canada

South Korea

US

South Africa

Italy

Japan

France

Mexico

Turkey

UK

Brazil

Germany

Basel Index

-32.0

-18.4

-17.3

-14.3

-12.8

-9.8

-8.8

-8.5

-5.5

-3.8

-3.8

4.5

11.0

-60 -40 -20 0 20

Spain

South Africa

India

Japan

Russia

Australia

US

UK

Canada

South Korea

Turkey

Mexico

Brazil

(Provisions-Delinquency) Capital

24.8

34.7

38.7

39.9

41.5

47.1

50.3

66.5

80.4

90.0

118.4

122.6

145.5

202.2

0 70 140 210

India

South Africa

Japan

UK

Australia

Mexico

Canada

Turkey

Russia

US

South Korea

Italy

Germany

Brazil

Net Assets/ Short-Term Liabilities

40

IV. Activity

• 2015: a year of adjustment; impact on the activity and lower growth rates (below potential) are expected; non-economic events overlap the cycle

• Resumption after confidence improvement

41 Sources: IBGE and Funcex

Supply: Lower Dynamism

Industrial Production Services Nominal Income

Crop Harvest Imports Quantum

% 1

2m

/pre

vio

us

12

m

% y

/y-1

% m

/m-1

2, 3

mm

a

% 1

2m

/pre

vio

us

12

m

2015: IBGE estimates in May/15

-4.8 -5

-4

-3

-2

-1

0

1

2

3D

ec 1

1

Apr

12

Aug

12

Dec 1

2

Apr

13

Aug

13

Dec 1

3

Apr

14

Aug

14

Dec 1

4

Apr

1516.3

2.5

5.9

-10

-5

0

5

10

15

20

25

30

200

3

200

4

200

5

200

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5

-5.9

-6

-3

0

3

6

9

Ja

n 1

2

Ma

y 1

2

Sep

12

Ja

n 1

3

Ma

y 1

3

Sep

13

Ja

n 1

4

Ma

y 1

4

Sep

14

Ja

n 1

5

Ma

y 1

5

2.9

2

4

6

8

10

12

Apr

12

Aug

12

Dec 1

2

Apr

13

Aug

13

Dec 1

3

Apr

14

Aug

14

Dec 1

4

Apr

15

42 Sources: IBGE and Funcex

Demand: Moderation in Line with Adjustment

Household Consumption FCGF

Government Consumption Exports Quantum

% c

han

ge in

4 q

uar

ters

% 1

2m

/pre

vio

us

12

m

% c

han

ge in

4 q

uar

ters

% c

han

ge in

4 q

uar

ters

0.2

0

1

2

3

4

5

6

71

Q 1

1

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

1Q

15

-6.9

-10

-5

0

5

10

15

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

1Q

15

0.4 0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

1Q

11

3Q

11

1Q

12

3Q

12

1Q

13

3Q

13

1Q

14

3Q

14

1Q

15

-1.2

-4

-2

0

2

4

6

Ja

n 1

2

Ma

y 1

2

Sep

12

Ja

n 1

3

Ma

y 1

3

Sep

13

Ja

n 1

4

Ma

y 1

4

Sep

14

Ja

n 1

5

Ma

y 1

5

43 Source: FGV

Consumer Confidence: Stabilization of Decrease

Note: Proportion of favorable answers – proportion of unfavorable answers + 100 (100=neutral)

Sep

/05

=10

0, s

.a.

Consumer Confidence Index

75

80

85

90

95

100

105

110

115

120

125

130

135M

ar

13

May

13

Jul 13

Sep

13

Nov

13

Jan 1

4

Mar

14

May

14

Jul 14

Sep

14

Nov

14

Jan 1

5

Mar

15

May

15

ICC

Current Situation

Expectation

44

Box: GDP Projection

• Revision of the 2015 growth rate, from -0.5% to -1.1% (domestic demand, -2.6 p.p.; and net exports, +1.5 p.p.):

• Supply:

• Agriculture and livestock: 1.9% (0.6% in 1Q2015)

• Industry: -3.0% (-2.5% in 1Q2015)

• Services: -0.8% (-0.2% in 1Q2015)

• Demand:

• Investments: -7.0% (-6.9% in 1Q2015)

• Households’ Consumption: -0.5% (0.2% in 1Q2015)

• Government Consumption: -1.6% (0.4% in 1Q2015)

• A 0.8% decrease in the four quarters ending in March 2016

45

V. Inflation Developments • The double relative prices adjustment (regulated and

external) impacted inflation in the first half of 2015, increasing the 12-month accumulated inflation; the target is to avoid its transmission to 2016 and beyond

• Monetary policy can and should contain the second-round effects, to circumscribe them to 2015; so it must remain vigilant to ensure the convergence of inflation to the target of 4.5% at the end of 2016

46

Inflation Developments: Led by Regulated Prices

Sources: IBGE and FGV

change in 12 months (%)

May/14 May/15

IPCA 6.37 8.47 ▲

Market Prices 7.07 6.82 ▼

Regulated 4.08 14.09 ▲

Tradables 6.67 5.71 ▼

Non-Tradables 7.42 7.79 ▲

INPC 6.08 8.34 ▲

IPC-C1 6.00 8.97 ▲

IGP-DI 7.26 4.83 ▼

IPA-DI 7.43 3.29 ▼

Agricultural 9.32 2.75 ▼

Industrial 6.73 3.50 ▼

IPC-DI 6.57 8.63 ▲

INCC-DI 7.75 5.74 ▼

47

0

2

4

6

8

10

Sep

12

Dec 1

2

Ma

r 13

Ju

n 1

3

Sep

13

Dec 1

3

Ma

r 14

Ju

n 1

4

Sep

14

Dec 1

4

Ma

r 1

5

Ju

n 1

5

IPP

IPA

IGP

% in

12

mo

nth

s Prices: Slow Adjustment in Non-Tradables

Sources: BCB, IBGE and FGV

Inflation (IPCA) Wholesale Prices and IGP

Services Inflation

% in

12

mo

nth

s %

in 1

2 m

on

ths

% in

12

mo

nth

s

Market and Regulated Prices

5,16 IGP-10

Jun 2015

5.63% IPP

Apr 2015

3.84% IPA-10

Jun 2015

6.8

14.1

0

2

4

6

8

10

12

14

16

Aug

12

No

v 1

2

Feb 1

3

Ma

y 1

3

Aug

13

No

v 1

3

Feb 1

4

Ma

y 1

4

Aug

14

No

v 1

4

Feb 1

5

Ma

y 1

5

market prices

regulated

7.8

5.7

2

4

6

8

10

Aug

12

Nov 1

2

Feb 1

3

Ma

y 1

3

Aug

13

Nov 1

3

Feb 1

4

Ma

y 1

4

Aug

14

Nov 1

4

Feb 1

5

Ma

y 1

5

non-tradables

tradables

8.2

7.5

7.7

7.9

8.1

8.3

8.5

8.7

8.9

9.1

9.3

Aug

12

Nov 1

2

Fe

b 1

3

Ma

y 1

3

Aug

13

Nov 1

3

Fe

b 1

4

Ma

y 1

4

Aug

14

Nov 1

4

Fe

b 1

5

Ma

y 1

5

48 Sources: IBGE and MTE

Wages: Adjustments in Progress, but still Risks av

erag

e an

nu

al in

crea

se %

Real Wages

* 12m through Apr; ** Unit Labor Cost in the Manufacturing Industry: Nominal Payroll/Physical Output

% in

12

mo

nth

s

ULC**

real

ad

just

men

t %

Labor Collective Conventions

4.0

3.2 3.4 3.2

3.8

2.7

4.1

1.8

2.7

1.2

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.52

00

6

200

7

200

8

200

9

201

0

201

1

201

2

201

3

201

4

201

5*

10.5

-2

2

6

10

14

Apr

11

Oct 1

1

Apr

12

Oct 1

2

Apr

13

Oct 1

3

Apr

14

Oct 1

4

Apr

15

2.6

-0.4

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

Ma

y 1

3

Nov 1

3

Ma

y 1

4

Nov 1

4

Ma

y 1

5

49 Source: BCB

Baseline Scenario: Interest rate constant at 13.75% p.y. and exchange rate of R$3.10/US$

BCB Inflation Forecasts

Obs.: 12-month accumulated inflation (% p.y.)

Period

Probability Interval

Central projection

50%

30%

10%

2015 2 8.9 8.9 8.9 9.0 9.0 9.1 9.0

2015 3 9.0 9.1 9.3 9.4 9.6 9.7 9.3

2015 4 8.4 8.7 8.9 9.1 9.4 9.6 9.0

2016 1 5.9 6.3 6.6 6.8 7.1 7.5 6.7

2016 2 4.5 4.9 5.3 5.6 6.0 6.3 5.4

2016 3 4.0 4.4 4.8 5.1 5.5 5.9 5.0

2016 4 3.8 4.2 4.6 4.9 5.3 5.7 4.8

2017 1 3.8 4.2 4.5 4.9 5.2 5.6 4.7

2017 2 3.5 3.9 4.3 4.6 5.0 5.4 4.5

50 Source: BCB

BCB Inflation Forecasts

Market Scenario*: 2015 Interest rate at 14.00% p.y. and avg. exchange rate of R$3.19/US$ 2016 Interest rate at 12.00% p.y. and avg. exchange rate of R$3.30/US$

Obs.: 12-month accumulated inflation (% p.y.); *data as of June 12th

Period

Probability interval

Central projection

50%

30%

10%

2015 2 8.9 8.9 8.9 9.0 9.0 9.1 9.0

2015 3 9.0 9.1 9.3 9.4 9.6 9.7 9.3

2015 4 8.5 8.7 9.0 9.2 9.4 9.6 9.1

2016 1 6.0 6.3 6.6 6.9 7.2 7.5 6.8

2016 2 4.6 5.0 5.4 5.7 6.0 6.4 5.5

2016 3 4.2 4.6 5.0 5.3 5.7 6.1 5.2

2016 4 4.1 4.5 4.9 5.2 5.6 6.0 5.1

2017 1 4.0 4.4 4.8 5.1 5.5 5.9 5.0

2017 2 3.9 4.3 4.7 5.0 5.4 5.8 4.8

51

Prospective Scenario – Monetary Policy

The Copom evaluates that the monetary policy should contribute to the consolidation of a favorable macroeconomic scenario in longer term horizons. In this sense, it reassures that, under the inflation targeting regime, it guides its decisions according to the values projected for inflation by the Central Bank and based on the analysis of alternative scenarios for the evolution of the main variables that determine prices dynamics.

The Copom evaluates that the scenario of inflation convergence to 4.5% in 2016 has strengthened. However, the advances pursued in inflation control – as shown by benign signs stemming from medium and long term expectations indicators – have not been sufficient yet.

52

Inflation Outlook

Thank you! Inflation Report June 2015