Brazil: after 20 weeks, market stops raising inflation estimate for 2022, sees higher interest rates

The market raised its interest rate forecast at the end of 2022, while inflation expectations improved – or at least are less worse

A costumer buys meat at a supermarket in Rio de Janeiro, Brazil May 10, 2019.
Photo: REUTERS/Pilar Olivares
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The financial market raised its projection for the interest rate at the end of 2022, after the Brazilian Central Bank (BC) adopted a tougher language when deciding last week to raise the Selic rate again, while inflation expectations improved or stopped worsening afterwards a long series of highs.

According to the Central Bank’s Focus survey — a weekly survey by the BC with financial institutions analysts — released this Monday, the forecast for the basic interest rate of the economy in 2022 rose to 11.50% a year, from 11.25 % of the document from the previous week.

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On Wednesday, the BC raised the Selic rate by 1.50 percentage points, to 9.25% per year, indicated a new high of the same magnitude for February and highlighted in a statement the importance of the tightening cycle advancing “significantly” in contractionary territory to consolidate the disinflation process and anchor expectations around targets.

The more assertive tone surprised a good part of the market, which came from worse economic activity data. Two days later, IBGE released a lower-than-expected November IPCA with better composition.

The inflation measures projected by analysts for Focus, by the way, have improved.

READ ALSO: Inflation revival is a victory, not a defeat, for central banks in major economies

The expected number for 2021 dropped from 10.18% to 10.05% — the first drop after 35 consecutive weeks of growth. The measure for 2022 remained at 5.02%, not rising after 20 straight weeks on the rise.

The 12-month forecast dropped from 5.36% to 5.21%, while the rate for 2023 dropped from 3.50% to 3.46%. The expected IPCA for 2024 had a slight drop, from 3.10% to 3.09%.

All annual projections from 2021 to 2024, however, remain above the targets for the respective years —3.75%, ​3.50%, 3.25% and 3.00%.

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In a scenario of still pressured inflation and higher interest rates, the economy suffers. The forecast for GDP growth in 2021 fell for the ninth week in a row, dropping from 4.71% to 4.65%.

The expected rate for 2022 was lower for the tenth week in a row, albeit only slightly — it dropped from 0.51% to 0.50%.

Regarding the exchange rate, the market started to see a higher dollar at the end of 2021 (BRL 5.59 instead of BRL 5.56), but kept the estimate for the currency at the end of 2022 at BRL 5.55.

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