The financial market forecast for the Extended National Consumer Price Index (IPCA), considered the country’s official inflation, dropped from 5.76% to 5.64% for this year. For 2023, the inflation projection stood at 5.23% against 5.17% last week. For 2024 and 2025, forecasts are for inflation at 3.6% and 3.2%, respectively.
The estimate appears in today’s edition (26) of the Focus Bulletina survey released weekly by the Central Bank (BC) with the expectations of financial institutions for the main economic indicators.
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, 3.5% for this year, with a tolerance interval of 1.5 percentage points up or down. The lower limit would be 2% and the upper limit 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%.
Driven by the increase in fuel and food prices, in November, inflation rose 0.41%. With the result, the IPCA accumulates an increase of 5.13% in the year and 5.90% in 12 months, according to the Brazilian Institute of Geography and Statistics (IBGE).
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.
The next Copom meeting is scheduled for January 31st and February 1st, 2023. For the financial market, the expectation is that the Selic will be maintained at the same 13.75% per annum in this first meeting of the year. But by the end of 2023, the estimate is that the basic rate will remain at 12% per year, against 11.75% per year forecast last week. As for 2024 and 2025, the forecast is for Selic at 9% 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 was adjusted to 3.04%, compared to 3.05% last week. For 2023, the expected growth of the Gross Domestic Product (GDP) – the sum of all goods and services produced in the country – was maintained at 0.79%. For 2024 and 2025, the financial market revised GDP growth expectations from 1.67% to 1.5% and from 2% to 1.9%, respectively.
As for the projection for the dollar exchange rate, the expectation is R$ 5.25 for the end of this year. By the end of 2023, the forecast is that the American currency will be at R$ 5.27, against R$ 5.26 last week.
