Brazil government raises 2021 inflation forecast to 4.4%

The ministry kept its 2021 and 2022 economic growth forecasts at 3.2% and 2.5%, respectively, noting that indicators in January and February suggest the economy continues to recover

Photo: REUTERS/Ricardo Moraes
  • Brazil’s economy ministry said food prices have continued to put upward pressure on overall inflation, even though the pace of the increase has cooled early this year;
  • Brazil’s Secretary of the National Treasury, Bruno Funchal, said on Wednesday that, judging by the calendar for vaccination of priority workers, the country should enter a period of “normality” between the end of June and the beginning of July.

Brazil‘s economy ministry raised its inflation outlook for this year to 4.4% on Wednesday, the same day the central bank is widely expected to raise interest rates for the first time in six years to combat the strong buildup in price pressures.

That is up sharply from the ministry’s previous forecast of 3.2% in November and well above the central bank’s year-end target of 3.75%. It is lower, however, than what many economists are projecting.

In a presentation covering the broad macroeconomic outlook, the ministry said food prices have continued to put upward pressure on overall inflation, even though the pace of the increase has cooled early this year.

The ministry kept its 2021 and 2022 economic growth forecasts at 3.2% and 2.5%, respectively, noting that indicators in January and February suggest the economy continues to recover.

But it warned that uncertainty surrounding Brazil’s economic fortunes this year remains extremely high, and forecast that the economy will contract 0.35% in the first quarter.

“The upsurge in the pandemic and increase in lockdown restrictions have raised uncertainty levels surrounding this year’s GDP forecast,” the ministry said, also noting that the global economic recovery is a potential upside risk to the outlook.

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‘We should enter a period of economic normality between the end of June and the beginning of July’

Brazil’s Secretary of the National Treasury, Bruno Funchal, said on Wednesday that, judging by the calendar for vaccination of priority workers, the country should enter a period of “normality” between the end of June and the beginning of July, from the point of view of economic projections.

He also added that, at the moment, vaccination is the best instrument of economic and fiscal policy. “The government’s aim now is this: to speed up the production or import of vaccines, the vaccination process of people,” he said in an interview with GloboNews, adding that immunization has a “total” correlation with the resumption of the economy, echoing the words of the holder from the economic portfolio, Paulo Guedes.

Funchal once again considered the need to control expenses, emphasizing that the capacity to finance new rounds of emergency aid is “extremely limited”, after hundreds of billions of reais spent on the aid in 2020 and the reissue of BRL 44 billion this year.

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“We also need to think in parallel. We have to think about the crisis now and in the post-crisis,” he said. “It is no use for us to take the wrong step at this moment and reach the post-crisis and the economy is mor disorganized. When we need to generate jobs for the poorest, we may have problems if we do not have good management of this fiscal part.”

The Treasury secretary also believes it is necessary to explain the details of the emergency decree – which allowed the coronavoucher to return – and to go beyond the trigger measures and counterparts, since, the text also includes improving the financial management of Brazilian government and expenditure control of states and municipalities.

“We need time to mature everything that this provisional measure brings. Then I think that all these benefits will become increasingly clear. And then the perception of how positive this approval was will spread through the market and society.”

Asked about the extra cost to the Brazilian government and the the basic interest rate (Selic) increases, Funchal said that the Brazilian Central Bank is doing its job, which is to control inflation, and that, if necessary, to raise interest rates.

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He calculated that for each 1 percentage point increase in the Selic rate, interest expense increases by approximately BRL 35 billion.

“The cost of debt is at historic smallest levels. I believe that this (the increase in expenditure on the higher Selic rate) should not hinder the role of the Central Bank”, he said, calling attention to the long interest curve – the one most correlated with investments and more sensitive to fiscal risks.