The market lowered its inflation forecast this year from 4.75% to 4.65%.

The financial market’s forecast for the broad national index of consumer prices (IPCA), the country’s official measure of inflation, has fallen from 4.75% to 4.65% this year. The assessment is contained in this Monday’s (23) Focus bulletin, the Central Bank’s (BC) weekly survey of financial institutions’ expectations of key economic indicators.

For 2024, the inflation forecast was 3.87%. For 2025 and 2026, forecasts are 3.5% for both years.

The estimate for this year is above the midpoint of the inflation target to which the BCH must adhere. The target set by the National Monetary Board (CMN) is 3.25% for 2023 with a tolerance range of 1.5 percentage points up or down. In other words, the lower limit is 1.75% and the upper limit is 4.75%.

According to BC, in the latest inflation report, there is a 67% chance that the official index will exceed the target ceiling in 2023.

The market’s forecast for inflation in 2024 is also higher than the center of the forecast, set at 3%, but still within the acceptable range of 1.5 percentage points.

In September, the rise in gasoline prices put pressure on inflation results. According to the Brazilian Institute of Geography and Statistics (IBGE), the IPCA was 0.26%. The percentage was higher than in August, which increased by 0.23%.

Cumulative inflation reached 3.50% this year. For the last 12 months, the index was 5.19%, which is higher than 4.61% for the previous 12 months.

Principal interest

To achieve the inflation target, the Central Bank uses the basic interest rate – Selic – determined by the Committee on Monetary Policy (Copom) at 12.75% per year as the main instrument. Price behavior has already led the BC to cut interest rates for the second time this semester, in a cycle that is set to continue with a 0.5 percentage point cut at subsequent meetings. After successive declines at the end of the first half of the year, inflation picked up again in the second half, but this increase was expected by economists.

Nevertheless, in the minutes of the last meeting, Copom reinforced the need to maintain a still accommodative monetary policy in order to consolidate the convergence of inflation to the target in 2024 and 2025 and anchor expectations. Uncertainty in the markets and the expectation of above-target inflation are of concern to the BC and are factors influencing the decision on the base interest rate.

From March 2021 to August 2022, Copom raised the Selic rate 12 times in a row in a cycle of monetary tightening that began amid rising food, energy and fuel prices. During one year, from August of last year to August of this year, the rate was maintained at the level of 13.75% per annum seven times in a row.

Before the hike cycle began, Selic was down to 2% per year, the lowest level in a historical streak that began in 1986. Due to the economic downturn caused by the COVID-19 pandemic, the Central Bank has reduced the rate to stimulate production and consumption. From August 2020 to March 2021, the rate was at an all-time low.

For the financial market, Selic should end 2023 at 11.75% per annum. By the end of 2024, the base rate is estimated to fall to 9% per year. At the end of 2025 and 2026, the Selic forecast is 8.5% per year for both years.

When Copom increases the prime interest rate, the aim is to curb hot demand, and this affects prices because higher interest rates make credit more expensive and encourage savings. But aside from the Selic, banks consider other factors when determining the interest charged to consumers, such as default risk, profit and administrative costs. Therefore, higher rates could also make it more difficult for the economy to expand.

When Copom lowers the Selic, loans become cheaper, encouraging production and consumption, reducing inflationary controls and stimulating economic activity.

GDP and exchange rate

The forecast of financial institutions for the growth of the Brazilian economy this year was 2.9%.

In 2024, the gross domestic product (GDP) – the sum of all goods and services produced in the country – is expected to grow by 1.5%. For 2025 and 2026, the financial market predicts GDP growth of 1.9% and 2%, respectively.

Finally, the dollar exchange rate forecast for the end of this year is 5 reais. The US currency is projected to remain at 5.05 reais until the end of 2024.