Itaú expects GDP to fall during the election period, sees inflation at the limit and interest at 11.75% in 2022

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Banco Itaú maintained its forecast of a contraction in economic activity for next year, started to see inflation at the limit of the target and projects that the basic interest rate will reach 11.75% in 2022.

According to a report released on Thursday (18) by the institution’s Macroeconomic Research area, GDP (Gross Domestic Product) growth should be 4.7% this year, lower than the 5% projected previously.

Projections indicate a stable GDP (variation of 0%) in the last two quarters of this year, with expansion of services and contraction of industry and commerce.

“For 2022, we maintain our forecast for a -0.5% drop in GDP, mainly due to the expected contraction in aggregate demand due to higher interest rates,” the bank said in a report signed by its chief economist, Mario Mesquita.

For the institution, the first quarter of 2022 will benefit from strong and one-off growth in agricultural GDP and the effect of the increase in the minimum wage on the purchasing power of families, but contraction is expected in the following three quarters.

The Ministry of Economy reduced on Wednesday (17) the official expectation for GDP growth this year from 5.3% to 5.1%. For 2022, the forecast dropped from 2.5% to 2.1%.

The inflation forecast for this year is 10.1% (7 percentage points related to fuel, electricity and food). In 2022, the IPCA would be at the target limit of 3.5% with a tolerance of 1.5 percentage points.

The bank says that inflation in industrial goods remains under pressure and shows greater persistence of the effects of production bottlenecks in some sectors, with an impact on items whose demand increased in the pandemic, such as electronics.

Itaú started to project a Selic rate of 11.75% in the first quarter of 2022, after the Central Bank’s decision to accelerate the pace of interest rate hikes in October, to 1.5 percentage points, to 7.75% per year , and signal that it should repeat the tightening in December.

“We believe that maintaining the 1.5 pp adjustment pace and the Selic rate at a significantly contractionary level will help in the disinflation process, even if they are not enough to ensure convergence to the target in 2022.”

The bank assesses that the PEC dos Precatórios, which changes the correction of the spending ceiling and defaults on part of the legal debts, be approved and that the primary deficit increase by 0.6% of GDP (R$ 55 billion) in 2021 to 1.5% of GDP (R$ 140 billion) next year. Gross debt would go from 82% to 86% of GDP.

“The rise in debt and public spending, amid high interest rates and low growth, suggests greater risks of a return to an unsustainable fiscal path ahead,” says the bank.

The institution maintained its exchange rate projection at R$ 5.50 at the end of 2021 and 2022. For Itaú, the increase in the base rate to a level substantially higher than that observed in other emerging countries would allow for an appreciation of the currency.

However, domestic uncertainties, especially related to the evolution of public accounts, added to a scenario of increased global inflationary pressures and anticipation of interest rate hikes in the US, still put pressure on the national currency.

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