06/24/2024 – 10:03
The financial market forecast for the Broad National Consumer Price Index (IPCA) – considered the country’s official inflation – increased, from 3.96% to 3.98% this year. The estimate is in the Focus Bulletin this Monday (24), a survey released weekly by the Central Bank (BC), with the expectations of financial institutions for the main economic indicators.
For 2025, the inflation projection also rose from 3.8% to 3.85%. For 2026 and 2027, forecasts are 3.6% and 3.5% for both years.
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The estimate for 2024 is within the range of the inflation target that should be pursued by the BC. Defined by the National Monetary Council (CMN), the target is 3% for this year, with a tolerance range of 1.5 percentage points up or down. In other words, the lower limit is 1.5% and the upper limit is 4.5%. For 2025 and 2026, inflation targets are set at 3%, with the same tolerance.
In May, pressured by food and beverage prices, country’s inflation was 0.46%, after having registered 0.38% in April. According to the Brazilian Institute of Geography and Statistics, in 12 months, the IPCA accumulates 3.93%.
Basic interest
To achieve the inflation target, the Central Bank uses as its main instrument the basic interest rate, the Selic, set at 10.5% per year by the Monetary Policy Committee (Copom). The recent rise in the dollar and the increase in economic uncertainty caused the BC to interrupt the interest cut started almost a year ago. At a meeting last week, the board unanimously maintained the Selic at that level after seven consecutive reductions.
From March 2021 to August 2022, the Copom raised the Selic rate 12 consecutive times, in a cycle of monetary tightening that began amid rising food, energy and fuel prices. For one year, from August 2022 to August 2023, the rate was maintained at 13.75% per year, seven times in a row. With price control, the BC started to make cuts in the Selic.
Before the start of the rising cycle, the Selic had been reduced to 2% per year, at the lowest level in the historical series that began in 1986. Due to the economic contraction generated by the covid-19 pandemic, the Central Bank had lowered the rate to stimulate production and consumption. The rate was at the lowest level in history from August 2020 to March 2021.
For the financial market, Selic should end 2024 at the level it is today, at 10.5% per year. By the end of 2025, the estimate is that the basic rate will fall to 9.5% per year. For 2026 and 2027, the forecast is that it will be reduced again, to 9% per year.
When the Copom increases the basic interest rate, the purpose is to contain heated demand, and this has an impact on prices because higher interest rates make credit more expensive and encourage savings. But, in addition to the Selic, banks consider other factors when defining the interest charged to consumers, such as risk of default, profit and administrative expenses. Therefore, higher rates can also make it difficult for the economy to expand.
When the Copom reduces the Selic, the tendency is for credit to become cheaper, encouraging 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 varied from 2.08% to 2.09%. For 2025, the expectation for the Gross Domestic Product (GDP) – the sum of all goods and services produced in the country – is growth of 2%. For 2026 and 2027, the financial market estimates GDP expansion also at 2%, for both years.
Exceeding projections, in 2023 the Brazilian economy grew 2.9%, with a total value of R$10.9 trillion, according to the Brazilian Institute of Geography and Statistics (IBGE). In 2022, the growth rate was 3%.
The dollar exchange rate forecast is R$5.15 for the end of this year. At the end of 2025, the forecast is that the American currency will remain at the same level.
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