Financial market raises inflation forecast from 5.88% to 5.91%

The financial market forecast for the Extended National Consumer Price Index (IPCA), considered the country’s official inflation, rose from 5.88% to 5.91% for this year. The estimate appears in today’s Focus Bulletin (28), a survey released weekly by the Central Bank (BC) with the expectations of financial institutions for the main economic indicators.

For 2023, the inflation projection was 5.02%. For 2024 and 2025, forecasts are for inflation at 3.5% and 3%, respectively.

The forecast for 2022 is above the ceiling of the inflation target that must be pursued by the BC. Defined by the National Monetary Council, the target is 3.5% for this year, with a tolerance interval of 1.5 percentage points up or down. That is, the lower limit is 2% and the upper limit is 5%.

Likewise, the market projection for 2023 inflation is also above the predicted ceiling. For 2023 and 2024, the targets set are 3.25% and 3%, respectively, also with tolerance intervals of 1.5 percentage points. That is, for 2023 the limits are 1.75% and 4.75%.

In October, inflation rose 0.59%, after three months of deflation. With the result, the IPCA accumulates an increase of 4.7% in the year and 6.47% in 12 months, according to the Brazilian Institute of Geography and Statistics (IBGE). For November, the Extended Consumer Price Index-15 (IPCA-15), which is the inflation preview, also increased by 1.17%[[

Interest rate

To reach the inflation target, the Central Bank uses the basic interest rate, the Selic, as its main instrument, set at 13.75% per year by the Monetary Policy Committee (Copom). The rate is at its highest level since January 2017, when it was also at that level.

For the financial market, the expectation is that the Selic will end the year at the same 13.75%. By the end of 2023, the estimate is that the base rate will drop to 11.5% per year. As for 2024 and 2025, the forecast is for Selic at 8.25% per year and 8% per year, respectively.

When the Copom raises the basic interest rate, the purpose is to contain heated demand, and this affects prices because higher interest rates make credit more expensive and stimulate savings. Thus, higher rates can also make it harder for the economy to expand. In addition to the Selic, banks consider other factors when defining the interest charged from consumers, such as the risk of default, profit and administrative expenses.

When the Copom decreases the Selic, the tendency is for credit to become cheaper, with incentives for production and consumption, reducing control over inflation and stimulating economic activity.

GDP and exchange rate

The projection of financial institutions for the growth of the Brazilian economy this year also varied, from 2.8% to 2.81%. For 2023, the expectation for the Gross Domestic Product (GDP) – the sum of all goods and services produced in the country – is for growth of 0.7%. For 2024 and 2025, the financial market projects GDP growth of 1.7% and 2%, respectively.

The expectation for the dollar exchange rate is R$ 5.27 for the end of this year. By the end of 2023, the forecast is that the US currency will remain at R$ 5.25.

Translated to english by RJ983

From Brazil, by EBC News