Monetary authority is excessively optimistic compared with projections of private-sector analysts

07/08/2022

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Central Bank’s building in Brasília — Foto: Jorge William/Agência O Globo

A survey carried out by the Central Bank with economic analysts before the last policy meeting, in June, and released Thursday morning puts at stake the inflation scenario outlined by the monetary authority, which is excessively optimistic compared with the projections of private-sector analysts.

In the June meeting, the Central Bank’s Monetary Policy Committee (Copom) projected a 4% inflation rate for 2023, the year that until then was the main target for monetary tightening. But the survey carried out days before the meeting shows that few market analysts think this is possible.

The median inflation projection for 2023 collected in the survey with 99 segments of the financial market, was 4.7%, as already unveiled by the Copom in its minutes. But now the survey reveals how the view of analysts is distributed around this median.

The first quartile of projections, that is, the group of most optimistic analysts, pointed to an inflation rate of 4.33%. In other words, less than a quarter of the analysts thought it was possible for inflation to stay below 4.33%. The highest quartile pointed to inflation of 5.1%.

In the June meeting, the Copom concluded that the balance of risks surrounding to inflation was symmetrical. That is, the upside risks to inflation, in relation to what was projected, were balanced with the downside risks.

This is a very different view from that expressed by financial market analysts: 76% identified predominant upside risks in their inflation projections for 2023, while 19% considered the risks balanced.

The divergence between the Central Bank’s and the financial market’s inflation projections, as well as the distinct views on the balance of risks, have repercussions on the credibility of the monetary policy strategy outlined by the Copom.

In practice, Copom is stating, based on its projections, that it will be possible to reach the inflation targets in 2023 without many additional hikes in the key interest rate, which in June was raised to 13.25% per year from 12.75% per year. The policymakers indicated a new hike for August, to 13.5% or 13.75%, and the maintenance of higher interest rates for longer.

The market’s consensus scenario for the economic slack is also more conservative than the Copom’s. The committee projects economic growth this year of 1.7%, higher than the 1.5% then expected in the median of market projections. Even so, the Copom thinks that economic slack will be higher at the end of this year, at 1.8%, compared with 1.5% expected by the market. The greater the slack, technically measured by the output gap, the greater the disinflationary force.

Since the slack estimated by the Central Bank and the market are very similar for the first quarter of this year, at 1.1% and 1%, respectively, the Copom is possibly estimating a higher potential GDP than the market – that is, the Central Bank would have a slightly more optimistic view than the market about how much the economy could grow without pressuring inflation.

Historically, the inflation scenario outlined by the Central Bank was not very different from that estimated by the financial market, but in the last year this divergence has widened. The monetary authority has been systematically projecting lower inflation than the market.

Normally, the inflation projected by the Central Bank diverges less than 0.3 percentage points from that of the market, for the relevant horizon of monetary policy. Last March, this divergence rose to 0.6 points and, as of May, to 0.7 points.

*By Alex Ribeiro — São Paulo

Source: Valor International

https://valorinternational.globo.com/