Market raises projection of economic growth to 2.14% in 2023

For next year, the expectation for the Gross Domestic Product (GDP, the sum of goods and services produced in the country) is for growth of 1.2%. In 2025 and 2026, the financial market projects GDP growth of 1.7% and 1.99%, respectively.

Already the forecast for the Extended National Consumer Price Index (IPCA) – considered the country’s official inflation – is also falling and went from 5.42% to 5.12% this year. For 2024, the inflation estimate was 4%. For 2025 and 2026, forecasts are 3.8% 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 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 Quarterly Inflation Reportthe chance of official inflation exceeding 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 sector, 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%.

Interest rate

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 that level since August 2022, and is the highest since January 2017, when it was also at that level.

For the financial market, the expectation is that the Selic will end 2023 at 12.25% per year. By the end of 2024, the estimate is that the base rate will drop to 9.5% per year. For the end of 2025 and 2026, the forecast is for Selic at 9% per year and 8.75% per year, respectively.

Prices

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. Finally, the financial market forecast for the dollar is at R$5 by the end of this year. By the end of 2024, the forecast is that the US currency will remain at R$ 5.10.