Government measures to increase social spending on the eve of elections tend to put additional pressure on inflation, in a scenario in which the process of rising prices on a global scale has also influenced local inflationary dynamics.
In this scenario, economists estimate that the reflections of the policies adopted by the Bolsonaro government on medium-term inflation should force the BC (Central Bank) to have to be even more aggressive in the conduct of monetary policy.
Since March 2021, the monetary authority has already raised the Selic rate from the historic low of 2% per year to the current 13.25%. And, in the Focus bulletin, the median estimate of economists indicates another 0.50 percentage point increase at the meeting of August 2nd and 3rd, with the basic interest rate at 13.75% in December 2022, retreating to 10 .75% by the end of 2023.
However, the expansionary fiscal policy, as well as the doubts that hover over the conduct of the economy from 2023 onwards, make an increasing number of economic agents start to bet that the BC will have to be even tougher in the process of interest adjustment.
Either with more increases than expected by the market consensus on the Selic, or with the maintenance of the rate at high levels for longer than expected.
Chief economist at Itaú Asset, Thomas Wu, projects that the Selic rate will reach 13.75% at the end of the current cycle of high interest rates. But, unlike peers, he assesses that the monetary authority will hardly have room to promote any reduction in the Selic rate in 2023.
Wu says that the increase in government spending to help the less favored classes makes sense, given the price shocks in Brazil and abroad, and the pressure caused on basic consumer items, such as food and energy. “Many countries are doing some fiscal policy that protects the most vulnerable,” he says.
The measure, however, makes expected inflation higher, which should prevent the BC from starting the process of loosening monetary policy from next year, says the chief economist at Itaú Asset.
He projects the IPCA (Broad Consumer Price Index) at 7.7% for 2022, and at 5.5% for 2023 – both projections are well above the inflation target to be pursued by the BC, of ​​3.5 % and 3.25%, respectively. “The BC will hardly have room for interest rate cuts in 2023.”
Deterioration of public accounts and inflation
On Monday (25), Citi revised, from 9.50% to 10.50%, the estimate for the Selic rate at the end of 2023. As for 2022, the projection was maintained at 13.75%.
While recent tax-reduction initiatives are driving prices down in the short term, the medium-term outlook for inflation has deteriorated further as relief measures are only temporary, Citi notes in a report.
“Persistent inflation, additional fiscal stimulus and stronger activity indicate a longer double-digit Selic rate,” says the US bank.
Still according to Citi economists, the continuous deterioration of global economic conditions tends to keep the real on the recent trajectory of devaluation against the dollar. Citi projects the exchange rate at R$5.42 at the end of the year – the currency ended the session this Friday (29) at R$5.17.
The appreciation of the dollar, in turn, tends to inflate an inflation that is already at very high levels in Brazil, since, with the more expensive American currency, the products that the country imports from the United States automatically also increase in price. .
Santander and Credit Suisse project Selic at 14.25%
On July 14, the day after the Chamber approved the PEC on Benefits, Santander increased its projection for the Selic rate at the end of 2022 from 13.50% to 14.25%, and from 10.50%. to 12% in December 2023.
According to the bank, the increase in inflation expectations for the next year since the last decision of the Copom (Monetary Policy Committee), together with a deterioration in the balance of risks, with the new fiscal impulses, were the main drivers that led to the revision . Numbers considered strong in terms of employment were also cited among the reasons for the adjustment.
“These factors generate an important risk for the scenario of a slowdown in economic activity anticipated by the BC for the second half of 2022 – which we understand as a strictly necessary condition for the rapid disinflation projected by the authority’s models”, said Santander in a report signed by the economist. bank chief, columnist for Sheet and former Treasury Secretary Ana Paula Vescovi.
Also according to the assessment of the Spanish bank, the BC should avoid an even sharper peak in interest rates in the current cycle, but keeping rates higher for longer.
“Still, we have identified the need for a further tightening of the Selic rate so that the BC can bring inflation closer to the center of the target in 2023.”
Also in the wake of the PEC approval, Credit Suisse revised its forecast for the Selic rate at the end of this year from 13.75% to 14.25% on July 13. For 2023, the estimate also rose, from 10.75% to 11.25%.
High and widespread inflation in various sectors of the economy and rising estimates for the IPCA next year were cited by Credit Suisse among the reasons that supported the revisions.
In the Focus bulletin of July 22, the projection for inflation, although it dropped from 7.30% to 7.20% for 2022, rose, for the 16th week in a row, from 5.20% to 5.30% for 2023.
The deterioration of the fiscal framework and a better-than-expected performance for the economy this year also contributed to Credit Suisse’s view of the need for a more aggressive tightening by the BC.
Economists estimate that, although the fiscal measures that benefit the low-income population, if on the one hand, boost economic growth in 2022, on the other hand, hide a cursed legacy for 2023, which should be marked by a growth below that initially forecast by the market, with more inflation and interest.
“Interrupting the tightening cycle at this point would be highly risky, given that inflation expectations are significantly unanchored, which could compromise the credibility of monetary policy and increase the cost of reducing inflation, and the fact that central banks around in the world are trying to reaffirm their credibility and commitment to keeping inflation low, which increases the risk of an even more depreciated domestic exchange rate,” Credit Suisse pointed out in the report signed by economists Solange Srour (Folha columnist) , Lucas Vilela and Rafael Castilho.
Symbolism for anchoring expectations
On July 13, chief economist at manager Tenax Capital, Débora Nogueira revised the forecast for the Selic rate at the end of 2022 from 13.75% to 14%.
According to her, the most recent data on activity and inflation suggest that the scenario in September will still be of significant detachment of prices for 2023 in relation to the target, requiring some additional action from the BC.
In October, the weight of 2024 for the horizon of monetary policy will gain space, while the weight of the contraction of economic activity in 2023 will also be greater, thus enabling the interruption of the cycle of high interest rates, says the expert.
“This additional 0.25 percentage point of the Selic in September will have a reduced impact on inflation, but bring an important symbolism at a time when the anchoring of expectations is the objective”, says the chief economist at Tenax.
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