Global activity and inflation started 2017 at a high note. In this environment, interest rates are set to rise in the U.S., but with modest wage pressure the Fed can afford to be gradual. We foresee 3 hikes in 2017, with the next move in May. China is also tightening policy, but activity should hold up for now. The background of better global activity and moderately rising inflation is positive for emerging markets.
However, global uncertainties remain high. In the U.S., it remains unclear how far President Trump will push for protectionism, block immigration and in what shape his tax reform will emerge from Congress. Europe has important upcoming elections, with the risk of radical change in France. And the risk of China slowdown is a constant threat.
In Latin America, recent indicators are consistent with our expectation of an economic recovery in South America, led by Brazil and Argentina. As the Fed raises interest rates, we expect some weakening of LatAm currencies relatively to the current levels. The trend of interest rates in South America is down, but high inflation expectations for this year in Colombia and Argentina are turning their central banks more cautious.
In Brazil, anchored expectations and falling inflation make room for a reduction in the inflation target to 4% for 2019. Economic activity shows signs of improvement in the margin, in line with our scenario. On the fiscal side, reforms will continue in focus this year. We expect the pension reform to be approved in the second quarter of 2017. We lowered our exchange rate forecasts due to a decrease in country risk. Falling inflation and the progress of fiscal measures allow for a sustained reduction in the interest rate. We now forecast the Selic rate at 9.25% at the end of 2017 and at 8.25% in 2018.