The financial market forecast for the Extended National Consumer Price Index (IPCA) – considered the country’s official inflation – rose from 5.74% to 5.78% for this year. The estimate appears in today’s Focus Bulletin (6), a survey released weekly by the Central Bank (BC), in Brasília, with the expectations of financial institutions for the main economic indicators.
For 2024, the inflation projection was 3.93%. For 2025 and 2026, estimates are for inflation at 3.5% for both years.
The forecast for 2023 is above the ceiling of the inflation target that must be pursued by the BC. Defined by the National Monetary Council (CMN), the target is 3.25% for this year, with a tolerance interval of 1.5 percentage points up or down. That is, the lower limit is 1.75% and the upper limit is 4.75%.
Likewise, the market’s projection for the 2024 inflation is also above the center of the predicted target – 3% – also with tolerance intervals of 1.5 percentage points.
According to central bank, inflation will only be within the target from 2024, when it should be around 3%, and in 2025, (2.8%). For these two years, the CMN establishes a target of 3% for the IPCA.
In January, the Broad Consumer Price Index-15 (IPCA-15)which is the preview of inflation, increased by 0.55%[accordingtotheBrazilianInstituteofGeographyandStatistics(IBGE)[segundooInstitutoBrasileirodeGeografiaeEstatística(IBGE)
In 2022, the Extended National Consumer Price Index (IPCA), which measures the official inflation, closed with a rate of 5.79% accumulated in the year. The target was set at 3.5%, with the same tolerance margin, and could vary between 2% and 5%.
Interest rate
To reach the inflation target, the Central Bank uses as its main instrument the basic interest rate, the Selic, 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.
After the first meeting of the year, last week, the Copom indicated that interest rates could remain high for longer than expected and did not rule out the possibility of new increases if inflation does not converge to the center of the target, as expected, in mid 2024.
For the financial market, the expectation is that the Selic will end 2023 at 12.5% per year. By the end of 2024, the estimate is that the base rate will drop to 9.75% per annum. As for 2025 and 2026, the forecast is for Selic at 9% and 8.5%, 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 ranged from 0.8% to 0.79%. For 2024, the expectation for the Gross Domestic Product (GDP) – the sum of all goods and services produced in the country – is for growth of 1.5%.
For 2025 and 2026, the financial market estimates GDP growth of 1.89% and 2%, respectively.
The expectation for the dollar exchange rate is R$5.25 by the end of 2023. By the end of 2024, the forecast is that the US currency will be at R$5.30.
