On the first business day of President Luiz Inácio Lula da Silva’s third government, markets once again improved their forecast for 2022 inflation but worsened their expectations for this year. According to this Monday’s Focus Report, a weekly Central Bank survey with top analysts, the year-end IPCA consumer price index is expected to have reached 5.62 percent in 2022 — against 5.92 percent a month ago — and 5.31 percent in 2023, up from 5.08 percent four weeks ago.
If these forecasts prove true, inflation in Brazil would be above the upper-limit target set by the Central Bank for three consecutive years.
Yearly inflation in Brazil has been cooling down in the last couple of months, largely thanks to a decrease in food prices (with international commodities prices easing) and fuel prices, the latter due to measures sanctioned by the government of former president Jair Bolsonaro aimed at reducing taxes on fuel.
And even though a good harvest and low economic growth should leave food prices with little room for major hikes, economists believe that inflation in 2023 will be pressured by so-called “regulated prices,” which include oil derivatives.
On the first day of the year, Lula signed a provisional measure extending the exemption from federal taxes on fuel for another 60 days, after being advised by allies that ending the exemption right at the beginning of the year would increase inflation and thus damage the government’s popularity in the first months of his term.
However, considering that taxes on gasoline will increase again after that period, analysts are already forecasting rising inflation for the coming years. Year-end IPCA rates for 2024 and 2025 are now at 3.65 and 3.25 percent, respectively, up from 3.5 and 3 percent a month ago.
In this scenario, inflation would be above the center of the Central Bank’s target for both years — which indicates a worrying lack of anchoring of market expectations and increases fears that a tighter monetary policy will need to be maintained for longer to tame inflation.
These fears have already appeared in this week’s Focus Report. Markets have raised their expectations for the 2023 year-end Selic rate from 11.75 to 12.25 percent from four weeks ago, while for the next two years, the rate has remained stable (rather than dropping) at 9 and 8 percent, respectively.
The first Focus Report of the year also showed that markets see GDP growth of 3.04 percent in 2022, followed by a slowdown this year at 0.8 percent. Analysts predict a stable exchange rate for the next three years, sticking to the 2023 rate of USD 1 : BRL 5.27.
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