Bank estimates a 0.84-percentage-point impact on inflation in its baseline scenario but warns the effect could double to 1.68 percentage points
Morgan Stanley economists are increasingly concerned about the potential impact of El Niño on Brazil’s economy, particularly on inflation. The U.S. bank’s baseline scenario assumes a moderate climate pattern but already points to significant effects on the country’s consumer price index. A stronger El Niño, however, could amplify those pressures and make it more difficult for Brazil’s Central Bank to follow its usual strategy of looking through weather-related inflation shocks.
Under Morgan Stanley’s baseline scenario, El Niño would add a cumulative 0.84 percentage point to Brazil’s official consumer price index (IPCA), with 0.34 percentage point in 2026 and 0.50 percentage point in 2027. Economists Thiago Machado and Ana Madeira expect the climate pattern to peak in the fourth quarter of this year.
Based on that scenario, the bank forecasts inflation at 5% at the end of this year and 4% in 2027, assuming food inflation of 7.2% in 2026 and 5.2% next year.
“In a strong El Niño scenario, more severe droughts and floods could significantly reduce agricultural productivity, increase transportation costs, and trigger sharp rises in food prices—particularly for coffee, sugar, grains, and perishable products—potentially adding 1.26 percentage points to the IPCA,” the Morgan Stanley economists wrote.
The bank also outlined a third scenario involving a very strong El Niño. Under those conditions, a sharp acceleration in food prices could add as much as 1.68 percentage points to headline inflation, “well above the range historically observed during strong El Niño episodes,” the economists said.
The bank’s assessment underscores heightened concern about the inflation outlook and its implications for monetary policy. Even so, Machado and Madeira believe the bar for further increases in the Selic policy interest rate remains high, even under a strong El Niño scenario.
“Past episodes suggest the Central Bank does not respond mechanically to El Niño-driven food inflation, and the current disinflation in oil prices should provide some short-term relief for inflation,” the Morgan Stanley economists said.
They cautioned, however, that the current environment already favors a more hawkish monetary policy stance because of inflation risks stemming from unanchored inflation expectations, resilient economic activity supported by fiscal measures, and expectations of higher global interest rates.
That combination of factors, they argued, “reduces the room for the Central Bank to simply look through an El Niño episode, especially if it proves to be strong or extreme.”
As a result, Morgan Stanley sees a risk that the monetary authority may be unable to resume its monetary easing cycle by December.
*By Victor Rezende — São Paulo
Source: Valor International
https://valorinternational.globo.com/