Opinion – Vinicius Torres Freire: Expectation of inflation and interest rates for 2023 rises

The inflation estimate for 12 months ahead has risen since the end of the election. It went from 5.1% to 5.4%. The expectation for the whole of 2023 increased from 4.94% to 5.08%.

It seems like nothing but:

1. monetary tightening, high interest rates, comes from the beginning of 2021, when Selic was at 2% per year. Since August of this 2022, it has been at 13.75%. At this point in the struggle, it would be convenient for expectations to be low. Optimists even expected the Central Bank to anticipate the start of interest rate reductions before the end of the first half of next year;
2. instead, interest expectations for 2023 also deteriorate. Until November 17, it was estimated that the Selic, the basic interest rate, guided by the Central Bank, would fall to a still horrible 11.25% per year at the end of 2023. Now it drops to just 11.75%.
3. since the week in which Luiz Inácio Lula da Silva argued with “the market” (a scarecrow) about deficits and debt, a month ago, the interest rate for one year went from 13.26% to around 14% year (13.92%, this Wednesday);

The most important thing to keep in mind here is that there is a worsening of expectations when a beginning of relief was expected, the beginning of a “virtuous circle”, a change of heart (and of interest rates and the exchange rate, of course) capable of even raising confidence and projections of growth to 2023.

Did not happen.

This Wednesday, the forgotten Central Bank kept the Selic rate at 13.7%, barely changing the statement in which it provides the summarized reasons for its decision and forecasts inflation returning to the target (3%) only after the first half of 2024. In addition, it reinforces that the interest and exchange rate soup may thicken, depending on what is done with deficits, debt and the rules to control public accounts. The general pessimism of the communique rose half a tone.

As always, it should be noted that none of these projections are written in stone, quite the contrary. Furthermore, the estimates are scattered (they vary widely, depending on who makes the informed guess).

As mentioned above, the median of 82 forecasts by private sector economists compiled by the BC until December 2 gave a Selic rate of 11.75% at the end of 2023. The projection by Itaú economists was 11%. Bradesco’s, 11.75%. That of Credit Suisse, seen in the market as more pessimistic, is surprisingly more pessimistic: Selic remains the same, until the end of 2023, at 13.75%. For the economists at Credit Suisse, the economic impulse of additional spending and the uncertainty about the new fiscal rules (any limiting public debt), will prevent the fall of inflation next year (which they estimate at 5.8%, compared to 5% of the Central Bank projection).

As can be read in the BC’s communiqué, inflation may be lower if the price of commodities in reais falls further, if the world economy moves even more slowly than currently imagined and the 2022 tax cuts continue in 2023. add: if the Brazilian economy also cools down more (and, likewise, the creation of jobs and the evolution of wages) _it will only be good if it is bad.

It should be easy to see that higher interest rates for longer will slow down the economy more, all things being equal.

The expectation of higher debt growth (because of higher federal spending and more interest spending, higher for longer) should keep rates from falling. The package of R$ 169 billion in additional spending agreed between Lula and Congress did not cause an additional worsening in market interest rates, but it should not allow for a greater decrease anytime soon. Also, there should not be a definition of the new fiscal rule so soon. The game goes into a worrying overtime.