Damage from fiscal uncertainty is already permanent, economists tell BC

In two days of closed meetings with the Central Bank, between Monday (8) and Tuesday (9), financial market analysts were unanimous about the damage caused by fiscal uncertainties in the economy. With that, economists should worsen in the coming weeks the projections for inflation and for the growth of the GDP (Gross Domestic Product) for the next year.

For many, according to reports from participants to sheet, regardless of Congress’s next steps on the fiscal agenda, the damage is already permanent. The assessment is that there was a loss of credibility in relation to the country’s fiscal anchor, which impacts indicators such as inflation, interest rates and exchange rates.

One of the participants, who preferred not to be identified, said that there is a crisis of confidence, reputation and loss of credibility that is already taking the economy to another equilibrium, changing expectations of exchange rates, inflation, growth, interest rates and dynamics of public debt.

The government’s move to circumvent the spending ceiling was poorly received by the market and led to a change in the BC’s stance at the last Copom (Monetary Policy Committee) meeting, at the end of last month. At the time, the basic interest rate (Selic) was raised by 1.5 percentage points, to 7.75% per year.

The increase was greater than that indicated at the previous meeting, in September, when it signaled that the Selic would rise again by 1 percentage point. The mayor’s president, Roberto Campos Neto, and directors reiterated in events in which they participated over the past few weeks that the plan was to maintain this pace in subsequent decisions.

In the week before the Copom, however, the government and its allies in Congress inserted in the PEC (proposal to amend the Constitution) that postpones the payment of court orders a change in the spending ceiling correction rule that, in practice, expands the limit federal expenditures with the main objective of financing the government’s new social program, Auxílio Brasil, which replaces Bolsa Família.

Given this, the BC had to accelerate the pace of monetary tightening to try to bring the inflation of 2022 and 2023 to the target.

The fiscal noise surrounding the possible breach of the spending ceiling has caused economists to worsen their projections for next year.

According to this week’s Focus bulletin, in which the BC releases market expectations, the Selic should end 2022 at 11% per year, inflation at 4.63% and GDP should grow by 1%. Four weeks ago, estimates were 8.75% per year, 4.17% and 1.54%, respectively.

One of the participants summarized that there is a consensus on the damage caused by fiscal uncertainties and also that there will be an economic slowdown and a drop in inflation in 2022. Economists, however, differ on the intensity of the drop in activity and disinflation.

According to reports, part of the economists says they believe that inflation will be between 5% and 6% next year and another part that thinks that the deceleration of the index will be greater, 4% and 5%.

Analysts presented the BC with lower projections for GDP with growth below 1% and expressed concern about the possibility of a retraction in 2022.

One of the participants said that everyone agreed that there was a relevant fiscal break. According to him, some are more pessimistic, others think there is an exaggeration in the market’s reaction, although he agrees that the movement of loss of confidence was significant.

Another guest stated that there are doubts about the level that the basic interest rate will reach, since with the new level of the dollar (around R$ 5.50) it would be difficult for the BC to put inflation at the center of the target in 2022 For him, even so, there would be a significant disinflation, from 9% to 5%.

As uncertainties increased, some analysts presented intervals for their projections – usually only one number is presented for each indicator.

At these meetings, which take place every quarter, the BC does not comment, only listens to economists’ analyses, demands and concerns. The meetings, held over two days and divided into three groups, precede the publication of the Inflation Report.