Financial market inflation forecast rises to 5.98%

The financial market forecast for the Extended National Consumer Price Index (IPCA), considered the country’s official inflation, rose from 5.96% to 5.98% this year. The estimate appears in this Monday’s Focus Bulletin (10), a survey published weekly in Brasília by the Central Bank (BC) with the expectations of financial institutions for the main economic indicators.

For 2024, the inflation projection was 4.14%. For 2025 and 2026, forecasts are for inflation of 4% for both years.

The estimate for this year is above the ceiling of the inflation target that must be pursued by the Central Bank. Defined by the National Monetary Council (CMN), the target is 3.25% for this year, with a tolerance interval of 1.5 percentage points up or down. That is, the lower limit is 1.75% and the upper limit is 4.75%. According to the BC, the chance of official inflation surpassing the target ceiling in 2023 is 83%.

The market’s projection for 2024 inflation is also above the center of the expected target, set at 3%, but still within the tolerance range of 1.5 percentage points.

In February, driven by the education group, with the readjustments applied by educational establishments at the turn of the year, the IPCA stood at 0.84%, according to the Brazilian Institute of Geography and Statistics (IBGE). With the result, the indicator accumulated an increase of 1.37% in the year and 5.6% in 12 months.

For March, Extended Consumer Price Index 15 (IPCA-15), which measures the preview of official inflation, recorded a change of 0.69%. The March IPCA will be released by the IBGE tomorrow (11).

basic interest

To reach the inflation target, the Central Bank uses the basic interest rate, the Selic, as its main instrument, set at 13.75% per year by the Monetary Policy Committee (Copom). The rate has been at this level since August last year and is the highest level since January 2017, when it was also at this level.

For the financial market, the expectation is that the Selic will end the year at 12.75% per annum. By the end of 2024, the estimate is that the base rate will drop to 10% per year. For the end of 2025 and 2026, the forecast is for Selic at 9% per year and 8.75% per year, respectively.

When the Copom raises 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 make it harder for the economy to expand. But, in addition to the Selic, banks consider other factors when defining the interest charged from consumers, such as the risk of default, profit and administrative expenses.

When the Copom decreases the Selic, the tendency is for credit to become cheaper, with incentives for production and consumption, reducing control over inflation and stimulating economic activity.

GDP and exchange rate

The projection of financial institutions for the growth of the Brazilian economy this year increased from 0.9% to 0.91%.

For 2024, the expectation for the Gross Domestic Product (GDP) – the sum of all goods and services produced in the country – is for growth of 1.44%. For 2025 and 2026, the financial market projects GDP growth of 1.76% and 1.8%, respectively.

The expectation for the dollar exchange rate is R$ 5.25 for the end of this year. By the end of 2024, the forecast is that the US currency will remain at R$ 5.27.