Opinion – Vinicius Torres Freire: Economy until 2023 depends on miracle in inflation and BC says it will play tough

The Central Bank warned that the hike in the basic interest rate will not have a refreshment any time soon. That is, it will still step on the accelerator until inflation expectations are on target in 2023. The 2022 target was already halfway to vinegar; if the IPCA stays below the 5% ceiling, that would be good.

Trading in giblets, for now, the Selic should reach at least 11.75% at some point in the next year, closing 2022 at 11.25%.

The increase in the Selic rate from 7.75% to 9.25% per year at this Wednesday’s BC meeting was kind of obvious. There was something new in the tone, in the “tough” message, perhaps to help deflate the economy with a bit of gogó, “in the scream”, showing a willingness to further salt up interest rates, even in this economy on the verge of falling into recession.

A less bad economy between now and 2023 will depend even more, therefore, on a somewhat miraculous drop in the rate of inflation. Furthermore, there is not much to hope for, other than that the government doesn’t pop some other bomb, that the presidential candidates don’t talk excessive nonsense, and that the world economy doesn’t have any tantrums.

The fire of inflation would have to go down a lot. The forecast is that the IPCA will continue growing at an annual pace of 10% until April, closing the year at 5%. But it would have to be much smaller and sooner. Thus, the famine would eat less of wages and the Central Bank could avoid a higher Selic hike, reducing the size of the loss for 2023, at least. It is worth noting that we have barely seen the effect of this year’s interest rate hike.

A faster and more unexpected drop in inflation depends on the price of the dollar. It may drop somewhat, with the rise in interest rates in Brazil, but it also depends on political turmoil (Bolsonaro, centrão, campaign). It depends on the Imponderável de Almeida of world finance. It still depends on confirmation of a refreshment from the global energy crisis, rain in Brazil, confirmation of a good agricultural harvest here (expectations are very positive, so far).

It would be a small, marginal improvement, perhaps to avoid recession.

In October, retail sales fell for the third consecutive month; the industry’s production, for the fifth month in a row, according to the IBGE figures. We are below the pre-epidemic level of February 2020. The first signs in November are of a further decline or stagnation. What remains of growth is in the recovery of the services sector.

High interest rates will put the public debt on the boil again. Government debt relative to the size of the economy (the debt/GDP ratio) is expected to fall from 89% in 2020 to around 81% in 2021, a reduction that was not even so good while it lasted.

GDP increased with the rapid recovery at the beginning of the year, but also because of inflation. Government revenues have also grown because of inflation, tax payments postponed from 2020, rising commodity prices and higher import tax collections, inflated by the expensive dollar, note economists at Bradesco. Next year, there will be no inflation effect, GDP growth should drop from 4.7% this year to something close to zero and debt interest payments should increase by 50% next year (from R$438 billion to BRL 658 billion, in Bradesco’s personnel accounts).

That is, anxiety about debt out of control will increase. This year, the fear had already increased, because of the workaround that the government and the center made with the spending ceiling, which helped to kick the dollar even higher, apart from the help of the barbarities of Bolsonaro.

In other words, apart from miracles, the next government will take over with the knife of interest and debt in the neck.