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The Brazilian monetary authority has been sailing in the dark for almost two weeks without the latest editions of the Focus survey, which collects the estimates of economic agents for several key indicators in the management of the country’s monetary policy, such as inflation (IPCA), activity (GDP), and interest rates (Selic). It does not mean, however, that market projections are not moving. Since the last Focus survey, released on March 28 and interrupted by a civil servants strike, the official inflation for March has frightened, the president of the Central Bank has reacted and the statistics agency IBGE has released the performance of the main sectors of the economy in February.
A survey carried out Wednesday by Valor with 74 financial and consulting firms shows a median projection for the variation of the country’s benchmark inflation index IPCA of 7.5% in 2022 and 4% in 2023. The lowest estimates are 6.5% for this year and 3.4% for next year, while the highest are 8.6% and 6%, respectively.
In the latest Central Bank bulletin, whose responses were collected on March 25, the median expectation for the IPCA was 6.9% in 2022 and 3.8% in 2023. The targets are 3.5% and 3.25%, respectively, with a tolerance of up to 5% and 4.75%, in that order. Valor’s survey is not directly comparable to Focus, which registers around 130 to 140 responses, but it helps to give a sense of direction.
“What led many people to revise [the inflation projection] recently was the IPCA of March, the biggest surprise in 20 years,” said João Fernandes, an economist at Quantitas, in reference to the monthly high of 1.62%. The median market expectation was 1.32%, according to Valor Data. “Before that, the revisions were just approaching the median, as some firms that had lower numbers raised their estimates. The data changed this dynamic. They all started to revise projections upwards”, Mr. Fernandes said. Quantitas forecasts inflation of 8.3% in 2022 and 4.3% in 2023.
Goods in general are to blame for current inflation, including the durable ones, like vehicles and electronics, and semi-durables, such as cleaning products, cosmetics and clothing, Mr. Fernandes said. The story, he says, is well known: the global lack of inputs, in the context of the pandemic, was in the process of normalizing, but ended up aggravated again by the war in Ukraine and the outbreak of Covid in China.
“Our biggest concern is basically with the inflation scenario. We experienced last year specific shocks that turned into generalized price hikes, and we had even more shocks on top of this already concerning picture. This is why we think that the IPCA will close the year at 8%, because inflationary pressures are very disseminated,” said Roberto Padovani, the chief economist at Banco BV.
These shocks will be more persistent than predicted, due for example to the secondary effects of inflation on fuels and other commodities, said Gustavo Arruda, head of research for Latin America at BNP Paribas. “When we do the math, we see that those risks are undersized.” He projects the IPCA at 8.5% this year and 4.5% next year.
In Brazil, Mr. Fernandes added, there is still a resilient labor market. “Even though we understand that a higher Selic will ease the pressure at some point, we see now labor costs gaining traction amid higher demand for in-person services. We saw the PMS [Monthly Services Survey] slowing down last month, but I think there will still be strong readings for three or four months.”
IBGE said this week that services fell 0.2% in February compared to January, seasonally adjusted, while the expanded retail market — which includes vehicles and construction materials and is what counts the most for the GDP — advanced 2%. Earlier this month, the institute said that industrial production had grown 0.7% in February.
Based on these indicators, the Central Bank would present Thursday its February Economic Activity Index (IBC-Br), which offers the market a barometer of the month’s activity, but the release is not expected to happen because of the strike. Valor Data’s survey with 27 analysts indicates a median increase of 0.4%.
Valor’s survey captured Wednesday a median projection for the GDP of 0.5% in 2022 and 1.2% in 2023, virtually the same as the Focus of April 28 (0.5% and 1.3%, respectively).
Another problem for inflation, according to economists, is the perception that inflation expectations are unanchored. “That leads to more persistent inflation. Even in sectors of the economy that are not directly affected by the conflict, just the perception that the cost of living is higher allows agents to pass on more price. Although we are a little blind because there has been no Focus survey, the dynamics of the daily price surveys show that inflation is not slowing down,” said Mr. Arruda, with BNP Paribas.
When “the regime in people’s minds” and the economy takes longer to deflate, the Central Bank “must try to ease the pass-through,” said Fernando Fenolio, the chief economist at WHG. The president of the monetary authority, Roberto Campos Neto, drew attention earlier this week when he acknowledged that the result of the IPCA in March was a surprise and said that “our inflation is very high.”
“The Selic rate today is our point of greatest uncertainty. We recently brought it to 12.75%, despite the math showing that it would need 13.5%, because the monetary authority made a point of affirming that 12.75% was enough. After the IPCA of March, Mr. Campos Neto opened the possibility of a stricter conduct, but we are still waiting for a more intense communication,” said Étore Sanchez, the chief economist at Ativa.
The survey for the Selic rate carried out by Valor is directly comparable to another one made by the newspaper in mid-March and showed no change in the projection of a median Selic rate of 13.25% at the end of the high cycle this year.
“The bar was high for the Selic to go above 12.75%, but it was only because of the Central Bank’s signaling, as on the inflation side the dynamics showed that prices were going to continue rising fast,” said Patricia Pereira, the chief fixed income strategist at MAG Investimentos. She revised her forecast for the Selic to 13.75% from 13.25% after Mr. Campos Neto’s remarks.
Some factors can help the Central Bank in its task. If the exchange rate remains below R$5 to the dollar, for example, this may translate into lower industrial prices, and the activity, as it gets weaker, would also contribute to a lower pass-through capacity, points Mr. Fenolio, with WHG.
The median of the exchange rate projections of the last Focus survey was R$5.25 at the end of 2022, while the one collected Wednesday by Valor indicates exactly R$5. Even so, it would be a more depreciated exchange rate than the current levels. “There doesn’t seem to be much more room for an appreciation of the real ahead. The United States will start to tighten interest rates, there is domestic uncertainty and commodities have already risen a lot at the peak,” said Ms. Pereira, with MAG.
Source: Valor International