Brazil’s inflation outlook darkens after Lula’s reelection

The median of the estimates collected by BGC points to inflation, as measured by the Extended Consumer Price Index (IPCA), of 5.30% this year and in 2027, and 4.30% at the end of 2028. This represents a sharp deterioration compared with Focus, the Central Bank’s weekly survey with economists, released earlier this week, when the median forecast stood at 5.19% for December, 4.34% for the end of next year and 3.75% for 2028.

“We regularly speak with a large number of asset managers, who tend to revise their short-term forecasts more quickly. That allows us to anticipate Focus survey movements by one to two weeks. Based on the figures we have, the market is pricing in a 0.96-percentage-point increase in its 2027 IPCA forecast and a 0.55-point increase for 2028. I don’t think that is a particularly large move,” said Carlos Thadeu, an economist covering inflation and commodities at BGC Liquidez.

He also noted that 11% of the firms surveyed now project inflation above 6%, pointing to a substantial deterioration in inflation expectations over the coming years.

Looking at the components of the 2027 forecasts, Thadeu estimates that food prices account for about 0.25 percentage points of the increase, regulated prices for 0.40 points, services for 0.31 points, and industrial goods for 0.11 points. “The biggest impact comes from fuel prices, particularly because the market understands that the government will not subsidize them indefinitely. In services, there is also considerable concern about the effects of changing the 6×1 work schedule,” he said.

In the BGC economist’s view, the market had previously been willing to give the opposition the benefit of the doubt regarding the possibility of introducing a new fiscal anchor. “Without that, the market has been left without a clear sense of direction,” he said. Economists are also deeply concerned about the effects of changes to working hours at a time when some sectors of the economy are facing labor shortages and some companies are already “being squeezed on margins as wholesale prices rise, along with financing costs and the tax burden.”

“Economic policy is what lies behind this inflation forecast revision,” Thadeu noted. He believes that, had the opposition won the presidential election, the market would have given it the benefit of the doubt regarding the possibility of a change in economic policy that could have paved the way for lower interest rates. “But now, no one expects a significant reduction in rates anymore. Interest rates will remain high over the next four years. I don’t know how this will be brought into balance without a recession to ease some of the pressures,” he said.

Thadeu believes that one way to mitigate the inflationary pressures now taking shape would be to put someone in charge of economic policy whom markets view as having enough independence to pursue the fiscal agenda. “The problem is that the market is skeptical at this point,” he said. In his view, the next finance minister will have a hard time earning investors’ confidence. “The problem is not just the fiscal deficit, but a spending policy in which spending exceeds revenue, pushing interest rates higher and creating a feedback loop that fuels the public debt.”

Some firms have already announced substantial changes to their inflation forecasts. On Wednesday (28), Buysidebrazil, led by economist Andrea Damico, said it had raised its 2027 IPCA forecast to 4.7% from 3.9%, while setting its 2028 inflation estimate at 4.0%.

Data collected by Valor in recent days also show notable upward revisions. Panamby Capital, led by former Central Bank director Reinaldo Le Grazie, raised its forecast for next year’s IPCA to 5.1% from 4.0%. Banco ABC Brasil increased its estimate to 5.0% from 4.3%, while Tag Investimentos lifted its projection to 5.5% from 4.6%.

“The reversal in expectations about fiscal policy happened very quickly, and this is not some abstract issue for monetary policy. It affects the basic inputs everyone uses to forecast inflation, including the Central Bank. When we went from Friday to Monday and pressed a button to update our forecasts, the Central Bank’s job became more difficult,” said Tiago Berriel, head of economic research at BTG Pactual, during a morning call.

“We have seen exchange-rate forecasts revised, and we will probably see inflation expectations worsen over the relevant policy horizon in the next Focus survey. When those inputs are fed into the Central Bank’s models, it will find that the room for rate cuts is uncertain,” the economist stresses. He no longer sees room for another cut in the Selic policy interest rate next week. “This is an environment of considerable uncertainty. If we factor in inflation inputs, which are still deteriorating, along with the enormous uncertainty about what lies ahead, a more cautious approach seems reasonable: wait and pause the easing cycle.”

*By Victor Rezende , Valor — São Paulo

Source: Valor International

https://valorinternational.globo.com/