Brazil's National Wide Consumer Price Index (IPCA) is now expected to have grown 5.76% by the end of the year, a marginal drop from the 5.79% projected in the previous Focus Bulletin weekly report by South America's largest country's Central Bank.
According to the same study, inflation for 2023 is projected at 5.17%, for 2024 it falls to 3.5% and then again to 3.1% for 2025.
The forecast for 2022 is above the ceiling of the inflation target that should be pursued by the Central Bank. Defined by the National Monetary Council, the target is 3.5% for this year, with a tolerance interval of 1.5 percentage points up or down. That is, the lower limit is 2%, and the upper is 5%.
The market's projection for inflation in 2023 is also above the expected ceiling. For 2023 and 2024, the fixed targets are 3.25% and 3%, respectively, also with tolerance intervals of 1.5 percentage points. That is, for 2023 the limits are 1.75% and 4.75%.
Driven by the increase in fuel and foodstuff prices, inflation rose 0.41% in November. With these results, the IPCA has accumulated a 5.13% rise this year and 5.90% over the last 12 months, according to the Brazilian Institute of Geography and Statistics (IBGE).
To reach the inflation target, the Central Bank uses the Selic basic interest rate set at 13.75% per year by the Monetary Policy Committee (Copom), as its main instrument. The rate is at its highest level since January 2017. The next Copom meeting is scheduled for January 31 and February 1, 2023. For the financial market, the expectation is that the Selic will stay at 13.75% but that it will thence fall to 11.75%. For 2024 and 2025, the forecast is for the Selic to remain at 9% a year and 8% a year, respectively.
When Copom increases the basic interest rate, the purpose is to contain heated demand, and this affects prices because higher interest rates make credit more expensive and stimulate savings. Thus, higher rates can also hinder the expansion of the economy. Besides the Selic, banks consider other factors when defining the interest rates charged to consumers, such as default risk, profit, and administrative expenses.
When Copom lowers the Selic, the tendency is for credit to become less expensive, with an incentive to production and consumption, reducing control over inflation and stimulating economic activity.
Brazil's economy is projected to grow by 3.05% this year. For 2023, the expectation for the Gross Domestic Product (GDP) - the sum of all goods and services produced in the country - is 0.79%. For 2024 and 2025, the financial market projects a GDP expansion of 1.67% and 2%, respectively.
The exchange rate with the US dollar is expected to stand at R$ 5.25 by the end of this year and R$ 5.26 by the end of 2023.
(Source: Agencia Brasil)