Market lowers inflation forecast from 5.69% to 5.42% this year
For 2024, the inflation projection was 4.04%. For 2025 and 2026, forecasts are 3.9% and 3.88%, respectively.
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 2023, with a tolerance interval of 1.5 percentage points up or down. That is, the lower limit is 1.75% and the upper limit 4.75%. According to BC, in the last Inflation Report the chance that official inflation will exceed 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 May, influenced by readjustments in the health and personal care industry, the IPCA was 0.23%, according to the Brazilian Institute of Geography and Statistics (IBGE). The result is lower than the April rate: 0.61%.
The accumulated IPCA in 12 months stood at 3.94%, following the downward trend shown since June 2022, when the index was at 11.89%.
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 since January 2017, when it was also at this level.
For the financial market, the expectation is that the Selic will end at 12.5% per year. 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. 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. Thus, higher rates can also make it harder for the economy to expand.
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 1.68% to 1.84%.
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 1.27%. For 2025 and 2026, the financial market projects GDP growth of 1.8% and 1.95%, respectively.
The forecast for the dollar exchange rate is R$ 5.10 for the end of this year. By the end of 2024, the forecast is that the US currency will remain at R$5.17.
Foto de © José Cruz/Agência Brasil
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