Inflation is expected to drop from 10% in 2021 to 5% in 2022, which will allow the Central Bank to reduce the basic interest rate from the first half of 2023. This is the assessment of Itaú Unibanco, which released this Wednesday. fair (15) details of your scenario for the coming years.
Mario Mesquita, chief economist at the institution, stated that the economy in 2022 will still be marked by the effects of the pandemic. This time, due to a drop in activity caused by the need for higher interest rates to control inflation generated by factors related to the health crisis.
Itaú projects an increase in the base rate from the current 9.25% to 11.75% next year. The economy is expected to grow 4.7% in 2021 and contract 0.5% in 2022.
More recent activity data show that this year’s result may be lower, but not much different than expected, according to Mesquita. For next year, the risk lies in the need for the BC to raise interest rates to something closer to 13% per year, which would lead to further economic retraction.
Asked about risks related to the electoral process, such as new pressures for increased spending, he said that the institution considers in its scenario any increase in risk perception that has an impact on the exchange rate, leading to increased inflation, the need for more monetary tightening and lower growth.
For the economist, the BC’s autonomy is a factor that brings a lower degree of uncertainty compared to past elections.
Mesquita also stated that he did not see additional pressures to increase the base rate in Brazil due to the increase in interest rates in the US, recalling that the Fed (the American central bank) should make an increase equivalent to the one announced by the Copom throughout the year of 2022 ( Monetary Policy Committee) in only one of its meetings. As a result, the interest rate differential will not fall — the Fed meets this Wednesday and should accelerate the pace of withdrawal of stimulus.
According to Itaú, the increase in interest rates is already reflected in the Brazilian economy, with a slowdown in concessions in recent months and a drop in sales in sectors that are more sensitive to credit, such as vehicles, furniture and construction material.
The expectation is for an increase in default, more concentrated in individuals than companies. Still, a more modest increase than in other periods when activity slowed down after a period of more exuberant credit growth.
According to the economist, the increase in the minimum wage at the beginning of the year and the drop in inflation throughout 2022 should be the factors that will improve the population’s living conditions. On the other hand, the institution still does not see a strong expansion of employment.
“The main legacy from 2022 to 2023 will be the reduction of inflation, which will allow the Central Bank, at the beginning of 2023, to begin a process of easing monetary policy,” he said.
“I don’t see the job market giving great encouragement. It’s more the reduction of inflation.”
On the fiscal issue, the institution does not rule out the possibility of a public sector primary surplus in 2021, due to factors such as high inflation, extraordinary income from dividends and good tax revenue from states and municipalities. This is unlikely to be repeated next year, as revenues tend to follow current inflation, while expenses are indexed to past inflation.
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