Arquivos inflation projections

Inflation projections around 5% consider that fuel prices will not be raised

10/13/2022

Brazil’s official inflation index IPCA is seen by some economists closer to the top of the target range for 2022, of 5%, or slightly below this level. These analysts believe that the recent inflation slowdown cannot be explained by the federal government’s tax-cutting move alone –a broad-based price settling down has also played a role, according to their view. But such projections depend, in general, on oil giant Petrobras holding down prices despite the higher cost of the commodity abroad.

The median projection of Focus – the Central Bank’s weekly survey with analysts – for IPCA in 2022 is at 5.7%. But since the end of September, the minimum projection is below 5% and declining, having reached 4.74% on October 7, the latest reading.

“Our projection is at 4.9% and the market is moving to something around 5.5%,” said Carlos Thadeu Freitas Gomes Filho, a senior economist at Asset 1. Among the reasons for projecting a slower inflation rate than the consensus of the market, and below the top of this year’s target range, he cited durable goods prices, which are expected to give a break; slowing food inflation; and lower travel prices.

The economist highlighted durable goods, saying that both supply and demand indicate lower prices. “Sales of cars are weak, for instance. On the supply side, we have already seen the chains indicating deflation in wholesale.” In addition, Mr. Gomes Filho sees slower food inflation ahead, including animal protein, a “well-stocked” segment.

Lower energy prices have also spread to other parts of the economy, said Alexandre Lohmann, the chief economist at Constância Investimentos. “In addition, raw materials have also contributed positively,” he said. He sees the IPCA at 5.2% at the end of this year.

Mr. Lohmann recalled that general price indexes have shown strong deflation, which may indicate that the IPCA will slow down. Plus, inflation cores – measures designed to ease the effect of more volatile items – have also sped up. The average inflation of the five main cores followed by the Central Bank went to 0.41% in September from 0.66% in August, and to 10.12% from 10.42% over 12 months, data by MCM Consultores show.

“If there is any additional fear of global recession affecting oil and other commodity prices, this could put the IPCA at the target this year, for example. At this moment, the projected inflation is very close to 5%.”

In the coming months, the federal decision to cut ICMS tax levied on telecommunications services will probably still reach final prices, which may ease pressure on services, said Mr. Lohmann. “Plus, cheaper energy is also expected to reach other prices, and commodity prices, which had been rising strongly, are likely to settle down,” said Mr. Lohmann. He believes that the Brazilian real could even gain ground against the dollar after risks brought by the presidential election are dispelled, which could help the IPCA to fall even more. “But now the focus is on waiting to see what will happen with gasoline prices.”

On Tuesday, after statistics agency IBGE released a 0.29% reading for the IPCA in September, some firms revised downwards their projections for this year, including Bank of America (to 5.3% from 5.9%), LCA Consultores (to 5.5% from 5.8%), Barclays (to 5.6% from 6%) and Credit Suisse (to 5.6% from 5.9%). Last week, Santander Asset had already cut its projection to 5.2% from 5.9%, while Itaú Asset reduced its forecast to 5.2% from 5.8%.

David Beker — Foto: Silvia Zamboni/Valor

David Beker, Bank of America’s head of economics for Brazil and Latin America strategy, cites as a reason for the change a stronger slowdown of regulated prices and service prices and the lower commodity prices and inflation core. Yet, according to him, the projection “included a larger impact of tax cuts on communication items and assumed that Petrobras will not raise fuel prices in the short term.”

On the other hand, BTG Pactual economists raised the projection for IPCA this year to 5.5% from 5.3% citing the worsened short-term perspectives for food inflation. “Recent news indicates harvest losses, and our reading for unprocessed food prices in the wholesale market indicate higher prices,” they wrote. This way, although BTG still sees lower inflation for semi-processed and processed food, the bank sees higher prices for fresh food “and, consequently, for food at home.”

*By Victor Rezende, Anaïs Fernandes — São Paulo

Source: Valor International

https://valorinternational.globo.com/

Lack of consistency in inflation projections still worries asset managers

09/08/2022

The Central Bank has tried to cool expectations that it will start reducing Brazil’s key interest rate as early as the first quarter of 2023. The fact that short-term inflation slowed down and commodity prices went south in the international market was a determinant to bringing down future interest rates in the last few days. This backdrop paved the way for the market to price in the yield curve the key rate, known as Selic, below 13.75% per year as early as March 2023.

The rise in future rates on Tuesday partly eliminated this variation. Yet, some market participants still expect interest rate cuts early next year.

Central Bank President Roberto Campos Neto told the audience at an event held by Valor on Monday that the monetary authority is not thinking about lowering interest rates at this moment. He has also reinforced the message of the last meeting of the Monetary Policy Committee (Copom), in August, when the Central Bank indicated that it will analyze the need for raising the Selic once more. Mr. Campos Neto’s message was reinforced by Bruno Serra Fernandes, the bank’s monetary policy director, who showed concern on Tuesday about the de-anchoring of inflation expectations for 2024 – the median is 3.43%.

“The work of the Central Bank has already been done. It recognizes this and has signaled that, from now on, it must remain cautious in order to bring inflation expectations to the target. We agree. The Central Bank must remain cautious, but we also think that this stance will make inflation converge to the target,” said Gustavo Pessoa, a partner and fixed-income manager at Legacy Capital. The firm’s baseline scenario includes rate cuts starting in March 2023.

“Since inflation is just starting to slow down, the Central Bank doesn’t want to commit to cuts, but reality will weigh in. Inflation has started to give way strongly, and not only because of the government’s measures. And this lower inflation has left the real interest rate [ex-ante] close to 9%, a level that will be enough to make inflation converge to the target. This will allow the Central Bank to start cutting interest rates at some point,” Mr. Pessoa said.

In Legacy’s view, in March 2023 the monetary authority will look, in particular, at inflation for 2024 on the relevant horizon, whose expectation is today at 3.43%. “We expect expectations to anchor again and the median of 2024 projections to return to 3% by March. The Focus expectations will probably drop, given the Selic rate level. So it would be a natural path for the Central Bank to start cutting interest rates. We think this will happen as of March, and how fast interest rates will drop depends a lot on inflation dynamics here and abroad,” he said.

On Monday, the yield curve was pricing a cut of about 0.20 percentage points in March 2023 as the starting point for an easing cycle. After the market closed on Tuesday, there was a relevant repricing, and the market stopped betting on cuts in the first quarter of next year.

Alexandre de Ázara, the chief economist of UBS BB, believes that Mr. Campos Neto wants to combat expectations of a premature start to the easing cycle. “I believe he said that it is important to maintain interest rates flat for a while. In my view, the Central Bank doesn’t like to see the market price cuts in the first quarter and I think he wanted to fix that,” he said.

Mr. Ázara believes it is early to price a cut in the first quarter, but sees room for stronger cuts throughout next year, as of June. UBS BB projects that in 2023 the Central Bank will make four 100-basis-point cut in the Selic rate, starting in the second meeting of the second quarter, and a final 50-basis-point reduction in 2023. In addition, the bank expects the cycle to continue in 2024, with the Selic reaching 7.75%.

“This will help inflation to converge to the target in 2024. If it falls too slowly, inflation will not converge in 2024. If it falls too early, it will not converge in 2023,” said Mr. Ázara, whose projection for Brazil’s official inflation index IPCA next year is 4%, well below the market consensus of 5.27%.

Cooler commodity prices in the international market have been key for the downward variation in short-term interest rates in recent weeks. Brent oil prices, now close to $90, drew attention.

Jose Carlos Carvalho — Foto: Leo Pinheiro/Valor

“For two and a half years, commodities put upward pressure on inflation. It was a headwind that is now changing a little into a tailwind. I think this factor hindered the Central Bank a lot, but now it can be helpful,” said José Carlos Carvalho, a partner and head of macroeconomics at Vinci Partners. Yet, he recalled that services inflation is still under pressure. “Activity is still strong and should remain that way, but commodity-related prices more than make up for the rise in services.”

Mr. Carvalho believes that the Central Bank closed the monetary tightening cycle with the Selic at 13.75% and has a downward trajectory of interest rates ahead, considering that the real interest rate in Brazil is between 7% and 8%. According to him, these are quite high levels, well above the natural rate of interest, which is around 4%. “With help from commodities and the time for monetary policy to make its effect, the cycle of Selic hikes is over. There is no reason for the Central Bank to deliver even higher interest rates,” he said.

The cycle of interest rate reduction is related to the new federal administration and its fiscal policy, the executive with Vinci said. “In the first quarter of 2023, the Central Bank will still want to understand the fiscal policy of the next administration. In the second quarter, if it is the right thing to do, it can start thinking about cutting interest rates,” Mr. Carvalho said.

The fiscal policy is precisely one point highlighted by Tomás Goulart, the chief economist of Novus Capital, to advocate the view that the key interest rate is unlikely to start being reduced at the beginning of next year. He also cited the level of interest rates in developed countries, especially in the United States.

“The fiscal anchor is the first condition for the Central Bank to start reducing the Selic. It must know what the fiscal anchor will look like in the next administration, given the fact that the spending cap has lost credibility,” he said, citing the rule created to limit growth in public spending to the previous year’s inflation, which was circumvented by the Bolsonaro administration. The monetary authority will only feel ready to start easing the Selic when it finds out which fiscal regime will prevail in Brazil, he said.

“And then, considering the legislative process, we still don’t know what the next administration will be and what will be proposed in terms of an anchor. There is no clarity at the moment. And the legislative process to replace the fiscal anchor and pass something in Congress that has credibility should take around six months, that is, it will be time-consuming,” he said. When assessing the necessary conditions for the Central Bank to start reducing the key interest rate, Mr. Goulart said that such a cycle may start in June or August 2023.

*By Victor Rezende, Gabriel Roca — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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