Itaú raises IPCA projections and warns of risks of revising inflation target

Itaú revised upwards its forecasts for the increase in the IPCA this year and next, citing uncertainties about the current monetary regime in Brazil, and warned of the risks of possible changes in the country’s official inflation targets.

Now, the bank expects the IPCA to advance 6.3% in 2023, against 5.8% previously estimated. For 2024, the inflation projection increased to 4.2%, from 3.7% in the previous scenario.

“Uncertainties about the commitment of economic policy to low inflation, including the BC’s (Central Bank’s) autonomy to pursue the inflation targets determined by the CMN (National Monetary Council), have raised doubts about the current monetary regime,” he said in a report. Mario Mesquita, chief economist at Itaú.

Itaú’s scenario review was released a few days before the first meeting of the CMN in the new government, scheduled for Thursday (16). The meeting of the body responsible for defining the country’s inflation targets will come after news that President Luiz Inácio Lula da Silva’s economic team is studying to anticipate a revision of the targets and possibly raise the target to be pursued by the Central Bank, with rumors that the president of the autarchy, Roberto Campos Neto, would accept the change.

“The maneuver of raising the inflation target seems risky, with benefits that are at most temporary and with the risk of causing a higher than planned increase in the inflation rate,” stated Mesquita.

Itaú maintained its projections for the Selic rate level at 12.50% at the end of 2023 and 10.0% at the end of 2024, but warned that, “if the worsening of inflationary prospects continues, the risk is that there will even be a new interest rate hike”.

Regarding activity, Itaú revised its projection for the expansion of GDP (Gross Domestic Product) in 2023 to 1.3%, against 0.9%, citing improvement in its proprietary activity indicators at the beginning of the year and global perspectives ” a little more favourable”.

However, Mesquita said, “our perspective is that this positive moment will be temporary and that the economy will return to the deceleration trend in the coming months”.

On the fiscal front, Itaú slightly improved its prognosis for the primary result to a deficit of 1.4% of GDP in 2023, against the 1.6% of GDP previously forecast, an adjustment that it attributed to the increase in its forecast for expansion of economic activity.

Even so, “the growth review only marginally helps the fiscal numbers and does not change the structural challenge of balancing public accounts”, warned Mesquita.