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Financial markets: Inflation forecast this year reduced to 4.59% from 4.63%

Financial market forecasts for the broad National Consumer Price Index (IPCA) – considered the country’s official inflation measure – fell to 4.59% this year from 4.63%. This estimate is in the Focus Bulletin this Monday (13), a survey released weekly by the Central Bank (BC) with financial institutions’ expectations for the main economic indicators.

Inflation for 2024 was projected at 3.92%. For 2025 and 2026, the forecast is 3.5% for both years.

The 2023 projection is above the center of the inflation target that must be adopted by BC. Defined by the National Monetary Council (CMN), the target is 3.25% for 2023, with a tolerance range of 1.5 percentage points up or down. In other words, the lower limit is 1.75% and the upper limit is 4.75%.

According to BC, in the latest inflation report, the probability of the official index exceeding the target range in 2023 is 67%. The market forecast for inflation to 2024 is also above the center of the expected target set at 3%, but still within the tolerance range of 1.5 percentage points.

The increase in air ticket prices in October put pressure on inflation. IPCA was 0.24% [https://agenciabrasil.ebc.com.br/economia/noticia/2023-11/inflacao-de-outubro-fica-em-024-puxada-pelas-passagens-aereas]According to the Brazilian Institute of Geography and Statistics (IBGE). The percentage was below the September rate, which increased 0.26%.

Accumulated inflation this year reached 3.75%. The index is up 4.82% over the last 12 months.

basic interest

To achieve the inflation target, the Central Bank uses the basic interest rate – the Selic – defined by the Monetary Policy Committee (COPOM) at 12.25% per annum as its main instrument. After a steady decline at the end of the first half of the year, inflation rose again in the second half of the year, but this increase was lower than economists had expected.

The price behavior has led BC to cut interest rates for the third time in the semester, with cuts of 0.5 percentage points expected to continue at the next meetings in this cycle. Still, in a statement issued last week, Coppom indicated that it could change the timing of the cut period if circumstances make it more difficult to lower interest rates.

From March 2021 to August 2022, COPOM raised the Selic rate 12 consecutive times, in a cycle of monetary tightening that began amid rising food, energy and fuel prices. For one year, from August last year to August this year, the rate remained at 13.75% per annum for seven consecutive times.

Before the beginning of the rising cycle, the Selic was reduced to 2% per annum, the lowest level in the historical series starting in 1986. Due to the economic contraction caused by the COVID-19 pandemic, the Central Bank had reduced it. Rate of encouragement of production and consumption. From August 2020 to March 2021, this rate was at the lowest level in history.

For financial markets, Celik should expire in 2023 at 11.75% per annum. It is estimated that the base rate will fall to 9.25% per annum by the end of 2024. For the end of 2025 and 2026, Celik forecast growth is 8.75% per annum and 8.5% per annum, respectively.

When COPOM raises the basic interest rate, it is intended to control hot demand, and this has an impact on prices because higher interest rates make credit more expensive and encourage savings. But, apart from Selic, banks also consider other factors when defining the interest to be charged to consumers, such as the risk of default, profits and administrative expenses. Therefore, higher rates may also make it difficult for the economy to expand.

When COPOM lowers the Selic, credit tends to become cheaper, stimulating production and consumption, reducing inflation and stimulating economic activity.

gross domestic product and exchange rates

Financial institutions’ forecast for Brazil’s economy growth this year was 2.89%.

For 2024, gross domestic product (GDP) – the sum of all goods and services produced in the country – is expected to grow by 1.5%. For 2025 and 2026, financial markets project GDP expansion of 1.93% and 2%, respectively.

The dollar exchange rate forecast for the end of this year is R$5. By the end of 2024, the forecast is for the US currency to remain at R$5.08. (Brazilian agency)

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