The Focus bulletin of financial market expectations represents a first warning sign to Central Bank’s strategy of stopping interest rates hikes in May at 12.75% per year, compared with 11.75% per year now.
Interest rate projections for the end of the monetary tightening cycle remained at 13% per year. But inflation expectations have gone up again.
Not only the IPCA – Brazil’s official inflation index – forecast by analysts for 2023, which is the main target of the interest rate policy, worsened. The forecast for 2024 also went up, which represents a further deterioration in long-term expectations.
The median inflation projection for 2023 rose to 3.8% from 3.75%, compared to an inflation target of 3.25%. There are leading indicators that it may move higher. The average of the projections is at 3.84%, and the median of the analysts that have revised their forecasts in the last five days is already at 3.9%.
The combination that many analysts believe could lead the Central Bank to review its interest rate plans happened last week: the rise in current inflation has caused a deterioration in long-term inflation expectations.
Two new facts may have contributed to the deterioration in expectations. First, the clear signal from the Central Bank that it is willing to stop the tightening cycle unless inflation surprises upwards.
Second, on Friday the preliminary reading IPCA-15 for March was released, at 0.95%, higher than forecast by the market. Analysts are revising their bets for the month’s price index to above 1.2%.
In theory, this short-term surprise is unlikely to contaminate inflation in 2023 and even less so in 2024.
Central Bank President Roberto Campos Neto was asked last week why the market was betting on current inflation for March higher than the 1.02% variation estimated by the monetary authority.
He answered that this short-term pressure was due to a faster pass-through of fuel adjustments unveiled by Petrobras. For him, the stronger increase in the very short term is likely to be offset by lower inflation later on. Thus, when analyzing a group of months, the effects would compensate each other, to a good extent.
The Focus data, however, show that the market has not made this compensation, at least for the time being. The inflation projected by economic analysts for this year rose to 6.86% from 6.59% in one week.
According to market projections, the 12-month inflation will continue to rise until May, exceeding 11%. It will only fall back below double-digit levels in July.
This heavier current inflation is contaminating more distant years. The market forecast for the IPCA in 2024 rose to 3.20% from 3.15%, compared with a target of 3%. The average of the projections for inflation in 2024 already stands at 3.27%.
Source: Valor International