Itaú Unibanco, Brazil’s largest private bank, has revised its forecast for Brazil’s 2022 GDP growth down from a slim 0.5-percent rise to a drop of 0.5 percent. The 1-point cut in expectations comes as the bank projects rising benchmark interest rates to finish 2022 at 11.25 percent (up from the current 6.25 percent), causing economic activity to remain weak.
According to Itaú, increasing fiscal uncertainty implies higher country risk, greater depreciation of the Brazilian Real, worse prospects for inflation, and, ultimately, a higher neutral interest rate.
Last week, the government announced it will poke holes in Brazil’s federal spending cap to pay for a new wealth-transfer program, with President Jair Bolsonaro hoping to increase his re-election chances. “Without a credible fiscal anchor, the Central Bank’s task of keeping inflation within the target band becomes all the more difficult,” the bank wrote in a report released on Monday.
Inflation in Brazil has topped the 10-percent mark for the first time since 2016, and many economists believe it will remain at high levels for much longer than initially anticipated.