Posts

Brazil may need to sacrifice GDP growth to tame inflation

Solange Srour — Foto: Silvia Costanti/Valor

Solange Srour — Foto: Silvia Costanti/Valor

Faced with a complicated scenario for inflation, which threatens to stay above the target cap for the third year in a row, as well as an exchange rate that may remain depreciated, despite a super-attractive interest differential compared to foreign countries, Brazil may face the possibility of having to “sacrifice” economic growth to control the pace of price hikes. This analysis comes from Solange Srour, chief economist of Credit Suisse Brazil. According to her, the country may have to face expansion rates around 1% or below in the coming years to enforce the target system.

The higher- than-expected reading of mid-month inflation index IPCA-15 for May strengthened the understanding that the Central Bank, contrary to its recent communication, will need to extend the monetary tightening cycle until August.

This change is close to the scenario already outlined by the Credit Suisse team, for whom the monetary authority will end the tightening cycle with the Selic interest rate at 14%. Despite the fact that the price dynamics continue to be qualitatively bad – a deflation was expected in May, but it does not look like it will happen – the economist sees a low chance that the cycle will extend much beyond its current projection.

On the other hand, Ms. Srour believes that the idea of trying to “exchange” an additional increase in the Selic in August for a more distant start to the cycle of cuts is risky. A recent study by Credit Suisse shows that since 1999, when the inflation targeting regime was implemented, the Central Bank has never ended a tightening cycle before seeing expectations stabilize or converge back to the target – which is not the case today. The same happens with the break-even inflation measures, which continue to deteriorate. “If the Central Bank stops in June, it will need to change communication,” she says, citing the decision to bring forward the change of monetary policy horizon and also new inflation projections.

Read the main excerpts from the interview below:

Valor: Credit Suisse recently raised its 2022 GDP projection to 1.4% from 0.2%, but cut 2023 projection from 2.1%. That is, the fall next year will more than offset the rise this year. Why is that?

Solange Srour: Starting in the second half of the year, we will see not only the lagged effect of monetary policy on activity, but also the high inflation starting to strongly affect disposable income. At the beginning of the year, it is harder to notice this because most salaries are raised by June and July, so people feel they have a higher income, then consumer spending gains steam. But as the year comes to an end, this is lost. Another factor that holds back GDP expansion next year is global growth. We are seeing substantial revisions of projections, this year driven by China and Europe, next year more by the United States, because we believe that the monetary policy there will be tighter than anticipated. Besides this, we cannot rule out the uncertainty about the prevailing agenda in Brazil from 2023 on. Today, this seems to be a topic that the market does not want to discuss much, but it certainly affects investment and consumer spending decisions. If there is too much uncertainty, this affects current activity. Current investment is not so weak because the commodities sector has holding up the ends, but the other industries already see a relevant drop, which is likely to be accentuated in the second half of the year. Considering a real interest rate of 6% in the next few years, it is very difficult to think of a higher growth rate than something close to 1%, which is what we project for 2023. On the contrary, we risk seeing a lower rate than that.

Valor: Why will we need to keep real interest rates so high?

Ms. Srour: Every time Brazil had a real interest rate as high as the current one, we also had a very expressive currency appreciation that helped to bring down inflation. This time, we see real interest rates high for a long time without a strong real. It reached R$4.6 to the dollar just to return to R$5, and is still oscillating. A stronger real is not enough. It must be seen as something more permanent in order for us to see a pass-through effect. The price takers need to see a consistent appreciation in order to pass this on to prices. There is a lag in all of this. So, if this happens, it will help a lot. If it doesn’t, the weight will fall on activity. A 1% growth is not enough to bring inflation down fast. Without a strong real, disinflation is going to be much more costly, slower and gradual, especially because inertial inflation increases after two and a half years of very high inflation.

Valor: Why do you believe the real will remain weak?

Ms. Srour: If you look at the fundamentals of a given model, commodities and real interest differential, the real should have been stronger in the past two years. There are several reasons for that. The main one is the uncertainty about what Brazil will be like over the next few years. It is very difficult to draw medium-term investments if it is unclear what is going to happen. Much of this uncertainty is related to the fiscal situation. As much as the spending cap [a rule that limits growth in public spending to the previous year’s inflation] is up, several expenses are held back, including pay increases for civil servants. There are also developments out there. The tightening of the U.S. monetary policy may strengthen the dollar, should the Federal Reserve need to tighten further than expected. And the slowdown in China may also be longer and start in 2023, which also makes it more difficult for the real to appreciate.

Valor: We have seen a very intense cycle of Selic (Brazil’s benchmark interest rate) hikes in the last months. Wasn’t it time for it to start having an effect on the activity?

Ms. Srour: I don’t think that it is not having an effect. Credit is more expensive, spreads are on the rise. The activity is not showing that because the effect of the opening has been much more intense and much slower than expected. Economists thought that the effect of the reopening on the economy would peak between January and February, but people seem to have accumulated some savings, so we see a very strong effect in services and consumer spending. This is not happening in Brazil alone. The same happened in Europe, where recent indicators from some countries did not come as bad as expected, precisely because of the longer effect of the opening.

Valor: In its statements, the Brazilian central bank has been trying to support a longer cycle of high Selic instead of additional hikes later this year.

Ms. Srour: Our study shows that in all monetary tightening cycles, the monetary authority paused when the difference between inflation expectations and the target was falling. In the current cycle, the Central Bank is trying to end the tightening while the gap is still rising. If this happens, it will be the first time. We believe this is complex, dangerous, considering that we have been missing the [inflation] target for two years. It is complicated to stop the cycle with expectations still rising and risking being above the target for the third year in a row. We have projected that the Selic would rise by August for some time now, which has now become a more consensual scenario. The [last reading of] IPCA-15 [Brazil’s mid-month inflation index, known as a reliable predictor for official inflation] was qualitatively bad and is likely to worsen projections for 2023.

Valor: Will the Central Bank still follow the path it has communicated?

Ms. Srour: If the Central Bank stops in June, it will need to lengthen the convergence period, admitting that the monetary policy horizon is now 2023 and also, to some extent, 2024. This is something we expected to happen in August, which is when the Central Bank typically starts to give more weight to the following year. So it will need to say that, or even that it will pursue this adjusted target, and no longer that of 2023. I think it is more likely to lengthen the horizon, but this will only be more credible if it puts projections closer to those of the market – today the Central Bank’s projections are very far from them. If the Central Bank wants to signal that it will stay put for a long time, but its projections are low, nobody will buy this for a long time, since the Central Bank’s own projections allow it to start cutting earlier as well. That is why I think it is very complicated to reconcile all this: to stop rising in a bad environment, with expectations moving away from the target, and to extend the horizon as it argues that it will stay still for a longer time to try and prevent expectations from unanchoring further.

Valor: Do you see any chance of the Selic going beyond the projected 14% a year?

Ms. Srour: I do not think the Central Bank will go much beyond 14%. We cannot rule it out at all, given what we have seen about inflation in Brazil and in the world. But I think it is very difficult to go beyond this because the Central Bank has communicated that the cycle is nearing its end, financial conditions are tight and this is going to have an impact on activity – it should already be influencing it, but some extraordinary factors, mainly fiscal, are preventing this. The real ex-ante interest rate is at a very high level, close to the peak. But we cannot rule out that the next move will be a hike, or that the cycle will stop for very long, especially because it may stop for the first time with a very large gap between expectations and the target.

Valor: How do you see the new change of Petrobras CEO?

Ms. Srour: We are facing a global problem of energy and food prices. Several countries, supported by international mechanisms, are creating policies to mitigate this shock. I believe Brazil should be adopting some more transparent measure for the budget, as was done by [President Michel] Temer at the time of the truck drivers’ strike. It could be even an extraordinary credit, instead of trying to make Petrobras hold prices or reduce taxes, because tax collection is surprisingly well, but this is something temporary, and tax breaks tend to be more permanent. A transparent mechanism avoids a greater impact on inflation and also a greater political impact.

Source: Valor International

https://valorinternational.globo.com

Analysis: Inflation nightmare is not over

The snapshot of inflation offered by mid-month inflation index IPCA-15 in May makes it clear that Brazil is still in inflation hell, unlike what Economy Minister Paulo Guedes said last week. Inflationary pressures remain widespread, with strong increases in the prices of services, industrial products, fuels and food at home. Even with the significant deflation of electricity rates, of 14.09%, the indicator rose 0.59%, well above the 0.45% of the consensus indicated by analysts consulted by Valor Data.

The 12-month inflation rose to 12.2% in May, the highest since November 2003, compared with 12.03% in April. It is much higher than the target for this year, of 3.5%.

Almost three-fourths of the items in the IPCA-15 for May went up, as shown by the diffusion index of 74.93%. This is lower than the 78.75% reading of the previous month, but well above the 67.57% of May 2021, according to figures from MCM Consultores Associados.

Inflation is still spread throughout the economy, despite the strong cycle of hikes in the Selic. The Central Bank raised Brazil’s benchmark interest rate to 12.75% a year from 2% in March 2021. In June, the rate will probably rise another 50 basis points, and a new hike in August cannot be ruled out.

Food-at-home prices helped to slow down the IPCA-15 to 0.59% in May from 1.73% in April, but the rise is still very significant. It rose to 1.71% from 3%, still a very strong increase. The 12-month inflation in this segment rose to 16.79% from 15.4%, MCM points out.

This high, persistent inflation of food-at-home prices helps to erode the popularity of President Jair Bolsonaro, especially among the lower-income population. The IPCA-15 for May, it is worth mentioning, measures inflation between the second half of April and the first half of this month.

The picture is also concerning in services inflation, which accelerated to 1% from 0.59% between April and May. The reopening of the economy, with the end of social distancing measures due to Covid-19, contributes to the significant rise in these prices, which in 12 months jumped to 8.16% from 6.68%.

Service underlying inflation — which concentrates the items that respond most to demand — also had a significant increase. It advanced to 0.98% in May from 0.67% in April, making the 12-month inflation jump to 8.36% from 7.4%, MCM figures show. The underlying services inflation excludes the domestic services, such as courses, tourism and communications, which are less affected by the economic cycle.

The collection of bad news doesn’t end here. Industrial goods saw inflation accelerate to 1.62% from 0.87%, as the Russia-Ukraine war contributes to problems in global supply chains, a process that had begun with the pandemic.

Prices of industrial goods rose 14.41% in the 12 months to May. It is the biggest increase since MCM records began, in July 2000. Until April, the increase was 13.7%.

The average of the five cores monitored more closely by the Central Bank once again showed a difficult picture for the fight against inflation. Measures that seek to reduce or eliminate the influence of the most volatile items, these five cores rose by an average of 1.1% in May, after rising 0.87% in April, according to MCM.

As a result, the 12-month inflation went to 10.14% from 9.34%, surpassing the double-digit level. It is another sign that inflation is not concentrated in a few items.

Electricity deflation was the main factor contributing to lower inflation in May. Since mid-April the green flag was turned on, which means that there are no additional charges on the electricity bill. As a result, the item dropped 14.09% in May’s IPCA-15.

Without this effect, the indicator would have risen 1.28%, instead of 0.59%. Fuel prices, which are President Bolsonaro’s obsession, rose 2.05% in May. This is a strong increase, although lower than the 7.54% seen in April.

Fuel prices, Bolsonaro's obsession, prompted another change in the command of Petrobras — Foto: Leo Pinheiro/Valor

Fuel prices, Bolsonaro’s obsession, prompted another change in the command of Petrobras — Foto: Leo Pinheiro/Valor

The dissatisfaction with the hike of these products explains another change in the management of Petrobras —the government announced Monday night the resignation of José Mauro Coelho as CEO of the state-owned company and the appointment of Caio Mário Paes de Andrade.

The panorama for inflation, as can be seen, is still complicated. Inflation hell is not behind us. This will probably require high interest rates for a long time, which will affect economic activity in the second half of the year and next year. The return of inflation to the target path, of 3.5% in 2022 and 3.25% in 2023, will not be easy.

Read more about inflation in Brazil.

Source: Valor International

https://valorinternational.globo.com

New reading shows inflation persistently at double-digit levels

Will Gold Save You From Inflation? - Macro Hive

The result of the Extended Consumer Price Index (IPCA) for April reinforces the complicated scenario for inflation. It is yet another price index showing inflationary pressures spread throughout the economy, with strong increases in food, fuel, industrial goods and services prices.

It was the eighth month in a row with the 12-month inflation at double digits, which shows the difficulty of the Central Bank to bring down inflation to levels close to the targets, of 3.5% this year and 3.25% next year.

This points to the need for further monetary tightening, with interest rates likely to remain high for longer.

The IPCA in April was 1.06%, above the 1% expected by the analysts heard by Valor Data, even with the 6.27% deflation of the electric energy item. In 12 months, the indicator has risen 12.13%, the highest since October 2003. In the first four months of the year, the variation already stands at 4.29%, 0.79 percentage points above the Central Bank’s target for 2022.

The diffusion index once again brought bad news. The data, which show the percentage of items on the rise in the month, was 78.25%. It is the highest since January 2003, according to MCM Consultores Associados. It is a highly pervasive inflation.

There are effects of the war between Russia and Ukraine, which puts pressure on commodity prices and affects global supply chains, and the impact of the reopening of the economy with the easing of social distancing measures due to the improving numbers of the Covid-19 pandemic.

The cores, which seek to reduce or eliminate the influence of the most volatile items, continue at very high levels. The average of the five measurements most closely monitored by the Central Bank was 0.95% in April, close to the 0.98% seen in March, according to MCM figures. In 12 months, the average of these cores went to 9.69% from 9.01%. In summary, even indicators that seek to isolate or reduce shocks to inflation are close to double-digit levels.

The rise in food at home prices slowed down a little last month in relation to the 3.09% seen in March, but the increase was still very strong, at 2.59%. In 12 months, food at home went to 16.11% from 13.72%. Fuels had another significant increase, with gasoline prices rising 2.48% in the month.

The trajectory of rising prices of industrial goods is impressive. In April, they increased 1.22%, the ninth month in a row with 1% or over, points out MCM. In 12 months, these products have advanced 14.22%. Two years ago, in April 2020, the inflation of industrial goods on this basis of comparison was 0.05%.

The problems in global supply chains, due to the pandemic and the war in Eastern Europe, put pressure on the prices of these products. A lower exchange rate could ease these pressures, but the rate has appreciated again in recent weeks, to around R$5.15 to the dollar.

Finally, there is services inflation, which accelerated to 0.66% in April from 0.45% in March, taking the 12-month inflation to 6.94% from 6.3%. In the case of core service inflation, which excludes the domestic services, courses, tourism and communication groups, the picture is even worse. The rise last month was 0.79%, bringing the 12-month inflation to 7.74% from 6.98%. This measure is concentrated in the items that are most sensitive to demand, pressured in the services sector by the reopening of the economy.

This inflationary picture is president Jair Bolsonaro’s greatest weakness in his quest for reelection, as it wreaks havoc on the population’s purchasing power. And new pressures on prices are underway. The increase in diesel oil prices announced on Monday, of 8.87% in refineries, will not have a great direct impact on the IPCA, but has an important effect on the economy, by increasing costs in various industries. Such high inflation for so long is one of the main reasons for the low popularity of Mr. Bolsonaro, who heavily criticizes Petrobras’s pricing policy.

Some analysts project a double-digit IPCA also this year, which will contaminate next year’s indicator, because of the carryover effect, the phenomenon whereby past inflation increases future inflation. This scenario requires higher interest rates for longer, which will hit economic activity in the second half of the year and next year. The Selic, Brazil’s benchmark interest rate, which was at 2% until March 2021, is expected to rise to at least 13.25%.

Source: Valor International

https://valorinternational.globo.com

Government eliminates import tax to curb inflation

Marcelo Guaranys — Foto: Marcelo Casal Jr./Agência Brasil
Marcelo Guaranys — Foto: Marcelo Casal Jr./Agência Brasil

The government is zeroing the import tax rate of several products to contain inflation, said on Wednesday the executive secretary of the Ministry of Economy, Marcelo Guaranys, in an interview to announce decisions taken by the Executive Management Committee of the Foreign Trade Chamber (Gecex/Camex). “These measures don’t reverse inflation, but businessmen think twice before raising prices,” Mr. Guaranys said. The discussion about steel was intense in the last two days, he added.

Beef, chicken meat, wheat and wheat flour, corn grain, cookies and crackers, and other pastry products had their import tariffs reduced to zero. Besides these, sulfuric acid and mancozeb (the latter had its tax reduced to 4%) are also on the list.

Tariffs were also reduced for two categories of steel, which are rebar used in construction, said Camex secretary Ana Paula Repezza “The impact, in this case, will not be direct on inflation,” she added, noting that the request to reduce steel taxes had been under consideration for eight months. For rebar, the import tariff fell to 4% from 10.8%.

The reductions are valid until December 31, 2022, and will bring an impact of R$700 million in tax waivers, said Herlon Alves Brandão, undersecretary of Intelligence and Statistics of Foreign Trade at Camex.

This loss, however, will not need to be compensated with the indication of other sources of revenue, because it is a regulatory tax, clarified the deputy executive secretary of Camex, Leonardo Diniz Lahud. “Import taxes don’t have a collection function, they regulate the market, either for one side or the other,” he said.

About the import tax of 4% established for steel rebar, Ms. Repezza said it is in line with the world average. She also added that the meeting held the day before with businesspeople from the steel sector was not the first to analyze the issue and that the decision taken now is the result of a process that has been going on for months and included a wide debate.

On Tuesday, after the meeting, leaders of the Instituto Aço Brazil, which represents steelmakers, said that Economy minister Paulo Guedes had instructed the team to re-examine plans to cut the product’s import tariff to 4% from 10.8%. The tariff cut is a request made by the construction industry, which complains of rising prices.

Mr. Guaranys contextualized the decision on the import tax by speaking that the opening of trade is related to improving the business environment and increasing productivity and competitiveness, one of the major pillars of economic policy. “We have made very important steps in this context,” he said. “Minister Paulo Guedes’s line is to make gradual opening.”

The first move was the 10% cut in import tariffs on capital goods and technology; then the 10% reduction of practically the entire Mercosur Common External Tariff (TEC). Then, an additional 10% cut was made on the tariffs for capital goods and technology and at the moment there are negotiations with Mercosur for a new cut in the TEC. Internally, the government cut the Industrialized Products Tax (IPI) by 35%.

“We have been going through a moment of great inflation, harmful to the population,” said Mr. Guaranys. “We he reduces rates on some specific products, with an impact on the population”.

Source: Valor International

https://valorinternational.globo.com

Analysis: Central Bank avoids new hints amid unchecked inflation

Central Bank building — Foto: Jorge William/Agência O Globo

Central Bank building — Foto: Jorge William/Agência O Globo

In an environment that is more uncertain than usual, the Central Bank’s Monetary Policy Committee (Copom) has chosen, in the minutes of last week’s meeting released on Tuesday, to describe in more detail how it sees this scenario, instead of signaling what its next steps could be. Even if the policymakers look to a longer horizon and adopt a cautious stance, the deterioration in the inflationary picture is likely to continue in the short term.

Last week, the Copom raised the benchmark interest rate to 12.75% per year from 11.75%. In the minutes in which it detailed the reasons for the decision, the committee invested in a section, much broader than the previous one, called “scenarios and risk analysis.” There, the Central Bank discusses risks that range from the war in Ukraine to the “Chinese policy to fight Covid-19” to the “persistently high demand for goods,” including in the United States. The policymakers also acknowledged that they discussed in the meeting “some likely explanations for the difference between the projection in its reference scenario [of the Central Bank] and the analysts’ projections” – a point that has been drawing the market’s attention for some time. Perhaps even more indicative is the fact that it has included the baseline inflation scenario in the section dealing with risks. In March, for example, this scenario was presented in the section that dealt with the economic situation. In other words: the main pillar on which the Copom relies to make its decisions about the Selic has lost reliability to some degree.

“The Committee judges that the uncertainty in its assumptions and projections is higher than usual,” it said on Tuesday regarding the baseline scenario.

In the opposite direction, the section that addresses the discussion about the conduct of monetary policy was much leaner in Tuesday’s minutes. The Copom affirmed that it opted “to signal as likely an extension of the cycle, with an adjustment of lower magnitude [than 100 basis points] in the next meeting.” But it said it decided on this signal, among other factors, since it “reinforces the cautious monetary policy stance and emphasizes the uncertain scenario.”

This does not mean that inflation will not get worse in the short term. In the Quarterly Inflation Report, a comprehensive document that details its assessment of the economic situation, the Central Bank projected that the Extended Consumer Price Index (IPCA) would be 1.02% in March – but the actual rate was higher, of 1.62%. Central Bank President Roberto Campos Neto acknowledged he was surprised by the reading.

April’s IPCA-15, a barometer for Brazil’s full month official inflation, continued to show deterioration, rising 1.73%. It was the highest level for April since 1995 and the also highest monthly rise since February 2003. As a result, the 12-month inflation rose to 12.03% in April from 10.79% in March. Besides the high readings, analysts have drawn attention to negative data, including qualitative aspects of inflation such as the diffusion index, which measures the number of products whose prices rose during the month. In Apex Capital’s calculations, the indicator reached 76% in April’s IPCA-15, the highest in almost 20 years.

To steer the Selic, Brazil’s benchmark interest rate, the monetary authority is currently aiming at 2023, for which the inflation target is 3.25%, with a tolerance interval of plus or minus 1.5 percentage points. But such a high and widespread inflation makes it difficult to bring the trajectory of prices to this target. As Valor reported Tuesday, inflation expectations have been deteriorating, both in the case of implicit projections in government bonds and in the estimates made by financial firms, consultancies and asset managers. Some firms project inflation of around 10% for this year. The Central Bank’s baseline scenario projections are 7.3% and 3.4% for 2022 and 2023, respectively. It is worth mentioning, also considering long-term inflation, the 8.87% adjustment made Monday by Petrobras in the price of diesel at the pump, which has a broad impact on the production chain.

In Tuesday’s minutes, the Copom acknowledges that the situation is serious, stating that “consumer inflation remains high, with increases spread among several components, and continues to be more persistent than anticipated.”

“Whereas inflation of services and industrial goods are still high, the recent shocks have led to a strong increase in the components associated with food and fuels. Recent readings were higher than expected, and the surprise came on both the more volatile components and the items associated with core inflation,” the Copom said. “As for the more volatile components, the increase of gasoline prices is still noteworthy, with greater and faster impact than anticipated. The inflation of the components more sensitive to the economic cycle and the monetary policy continues elevated, and the various measures of core inflation are above the range compatible with meeting the inflation target.”

The format of the minutes’ wording may have changed, in part, because of the presence of Central Bank’s new director of economic policy, Diogo Guillen, appointed at the end of April. But it is hard to deny that, in the face of such external and internal uncertainties, the monetary authority has been opting for a more cautious stance since last week. It is also clear that the inflationary environment continues to worsen in the short term.

Source: Valor International

https://valorinternational.globo.com

Inflation expectations put pressure on Central Bank

The challenge of inflation, which was already a tough one, has become even more arduous. Inflation medium-term expectations are increasingly unanchored considering projections of market economists and the inflation priced into financial assets. The consequence is clear in the behavior of the interest rate market, which has come under pressure amid the perspective of even higher rates for a long period of time.

Strong swings in the rates of the NTN-Bs, the government bonds pegged to Brazil’s official inflation index IPCA, shows a worsened perception of inflationary risk ahead. The inflation priced by NTN-Bs maturing in August is close to 9% — it reached 8.73% on Friday. Expectations seem to be increasingly unanchored even for those with longer maturities. The inflation priced by the NTN-B maturing in August 2050, which started the year at 5.19%, reached, at the end of last week, 6.39%.

“The market has been pricing the gasoline lag in recent days. People start to account for the impact of the adjustment on fuel prices and its side effects. From there, they start to include inflation premiums in the curve,” said Pedro Nunes, ACE Capital’s fixed income manager, when justifying the strong upward movement of inflationary expectations in the market. On Monday, Petrobras unveiled an 8.8% adjustment in diesel prices at the refineries but kept gasoline prices unchanged.

The strong rise in fuel prices abroad also helps explain the recent advance of the breakeven inflation, said Maurício Patini, Brazil interest rate manager at Absolute Investimentos. He added that the current inflation data for the first quarter of the year also help explain the rise in market inflation, since they are higher than expected.

According to Mr. Patini, this generates more revisions due to the high correlation with a large part of regulated prices “and shows that the Central Bank’s job has become more difficult, given that inflation is widespread.”

Not coincidentally, interest rate futures have been under considerable pressure in recent days, as the market begins to see more clearly the Selic, Brazil’s benchmark interest rate, at an even higher level for a longer period. “People have the end of the cycle in their minds, but we believe that since inflation is rising, it is difficult for the Central Bank to indicate that it will stop. It is a very big risk. We think that a 50-basis-point hike in the next meeting is the floor,” said Mr. Nunes, with ACE Capital.

For him, the likely adjustment in gasoline prices and a still very pressured external inflation show how difficult Central Bank’s job is now. “I think it is very risky for the Central Bank, as the policymaker, not to keep inflation in check and then be forced to raise interest rates again later on. He can’t take that risk. That is why we think the Central Bank could end up raising interest rates a little more,” Mr. Nunes said.

The concern regarding an even more challenging inflation is also materialized in the projections of market economists. Last week, J.P. Morgan raised its projection for the IPCA in 2022 to 9.1% from 8%; Safra increased its estimate to 8.1% from 7.3%; Itaú Unibanco now sees the IPCA at 8.5%, and no longer at 7.5%; Banco do Brasil raised its projection to 8.5% from 7.8%; and BNP Paribas now expects inflation to end the year at 10%, and no longer at 8.5%.

Part of the recent worsening of expectations reflects agricultural supply shocks; the proximity of the summer in the United States., which is likely to increase demand for diesel; and the possibility of European sanctions on Russian oil. “We are very likely to experience a period of major supply shortages in the next two, three months,” said Carlos Thadeu Freitas Gomes Filho, a senior economist at Asset 1. His concern is translated into a projected IPCA of 9.5% in 2022, with chances of reaching 10% with the gasoline adjustment, and 5% in 2023.

In BTG Pactual Asset Management’s macroeconomic scenario review, economist Stefanie Birman reveals that the firm now projects inflation rates of 9.7% this year and 6% in 2023. “We saw a broader rise in expectations,” she said. Ms. Birman also pointed out that, regarding the IPCA in the short term, BTG Asset expects that, in the March-May period, the IPCA will be 1 percentage point higher than the Central Bank’s projected in the March Inflation Report. Then, the monetary authority estimated that the IPCA between March and May would be 2.1%.

Paulo Val — Foto: Leo Pinheiro/Valor
Paulo Val — Foto: Leo Pinheiro/Valor

The prospect of higher, resilient global inflation is increasingly present in the composition of scenarios, said Paulo Val, chief economist at Occam. “Without a doubt, it will be challenging for our Central Bank. In the past decade and the decade before, global inflation was a disinflation drive for us, and that is an important thing that has changed,” he said. Occam projects the IPCA at 8.4% this year and at 4.6% next year, with an upward bias on both forecasts.

Mr. Val expects another 50-basis-point hike in the Selic in June, to 13.25%. Then, according to him, the Central Bank is likely to wait the elections to evaluate what the new fiscal policy will be. “If they are consolidation policies, that really control spending more clearly and society perceives it that way, I think it eases monetary policy a little bit.”

The fact that inflation has been above the center of the target since the end of 2020 and above the top of the target range since the beginning of 2021 weighs on the longer horizon, Mr. Val said. “It’s a long period already.”

In addition, fiscal policy can be a big question mark in perspectives. “You have this uncertainty about what the fiscal framework will be starting next year, regardless of who wins the elections. This fans inflation,” he said. Besides this and the external challenges already mentioned, there is the fact that emerging countries have a more chronic inflation problem, Mr. Val said. “This whole environment of uncertainty around inflation generates demand for more premium, even over longer horizons.”

Source: Valor International

https://valorinternational.globo.com

Inflation, interest rates impact home appliances

The production of household appliances faces a deep decline in 2022 due to rising inflation and interest rates. The segment had already been struggling to receive inputs and saw costs soar amid a disrupted production chain and higher commodity prices brought by the pandemic. Now, consumers’ tight budgets – eroded by higher spending on food, electricity and fuel – are taking a toll on manufacturers.

The production of appliances plummeted 25.3% year over year, a survey by statistics agency IBGE shows, the third consecutive quarter of decline. A double-digit contraction is also clear in segments like white goods (refrigerator, stove, washing machine), brown goods (TV and stereo) and portable appliances. At the same time, the prices of appliances and equipment rose 7.46% in the same period, up 20.43% in the 12 months through March, according to data from IBGE and the Extended Consumer Price Index (IPCA), reflecting the higher production costs in the industry.

The war in Ukraine and the new outbreak of Covid-19 in China further aggravate a situation considered “challenging” by executives, who want to avoid a negative tone. The Asian country is shutting down plants due to lockdowns, especially in Shanghai, which impacts some companies.

Some companies are already seeking new suppliers of inputs – dual sourcing has expanded because of problems faced during the pandemic – and also air freight to shorten travel times for some products, while others are adopting a wait-and-see approach. Officially, all companies rule out the possibility of interrupting lines, but part of the market may face this risk.

Sergei Epof — Foto: Divulgação
Sergei Epof — Foto: Divulgação

“The drop in the first quarter is very much related to the consumer’s cash flow. Inflation has risen sharply and default rates too. The money available among Brazilian consumers for buying home appliances has been used for food, electricity and gasoline,” said Sergei Epof, Panasonic’s vice president of appliances in Brasil. His team focuses mainly on the white line, since the company halted the production of the brown line in the country last year, following a global strategy.

The Brazilian market is experiencing a combination of weaker demand, more expensive goods – as higher costs are passed on to prices – and more expensive credit, he said. Given the high interest rates, the consumer has been paying more for loans and default rates are on the rise.

“Demand has fallen and the price of appliances has risen. We had a lot of cost increase, which includes international freight, because of oil, the foreign exchange rate, which remains high despite the small recent drop, and inputs such as steel, resin and semiconductors,” Mr. Epof said. Part of the cost was passed on to consumers, he added.

As a result of inflation of inputs and falling purchasing power, “demand virtually disappeared,” said Marcelo Campos, managing director at Esmaltec. The company, which makes household appliances for Ceará-based Edson Queiroz group, has seen disappointing results since the middle of last year, especially in the last quarter of the year, typically a good time for durable goods sales due to Black Friday and the holidays. This happened after a surge in demand for appliances after the initial months of the pandemic, as people stayed at home.

The higher cost of components especially impact companies like Esmaltec, which works with the so-called entry-level products – those with lower prices, Mr. Campos said. Steel rose 163% in 2021, according to him, and is up 20% this year. This affects items such as compressors, evaporators and condensers for refrigerators. “Part of the cost has been passed on to consumers, but there is also a great effort to review negotiations with suppliers and processes to hold on some of the pressure,” he said.

The worsening of Covid-19 cases in China brought back the concern of shutdown factories at a time when the supply of inputs was already normalized, said Silvia Tamai, head of marketing for Latin America at Philips Walita, the company’s division of portable appliances.

“The situation of delays and lack of inputs had already been very much reduced. Our prospect in January was very positive as we had returned to a normal level. But the situation started to concern again around a month and a half ago.” Despite that, she still expects higher sales volumes in 2022 than last year.

The problems affect both the inputs used directly in the plant in Varginha, Minas Gerais, and the portion of products imported directly from other units, such as some models of coffee makers that come from Europe. Most of the inputs and products are produced in Brazil, she said, but even so the imported ones impact the production flow.

“There is a filter that goes into the espresso machine that comes from China. We bring the product from Europe, but they also depend on some component that comes from China,” she said.

Electrolux said in its global first-quarter financial report that falling sales in Latin America are linked to the decline in demand in Brazil, since inflation and high interest rates affected consumers’ purchasing power.

Whirpool, owner of Brastemp and Consul brands, did not mention the situation in Brazil in its first-quarter report, but predicted a decline in the household appliance industry as a whole in Latin America, Europe, Middle East and Africa this year.

Source: Valor International

https://valorinternational.globo.com

Exchange rate keeps inflation under pressure

Despite the higher foreign exchange rate in the last few days, it’s still down more than 10% this year. The lower level takes time to be seen in inflation, as the Central Bank has stressed recently, including in recent private meetings in Washington. With commodity prices still high and the prospect of weak economic growth in Brazil this year, however, economists estimate a very limited contribution.

Considering commodities prices in reais – a barometer for imported inflation –, the higher exchange rate and the state of the economy (measured by the output gap), Alexandre Teixeira, an economist at MCM Consultores, calculates that the exchange rate will ease Brazil’s official inflation index IPCA by only 0.13 to 0.15 percentage point in four quarters.

“The exchange rate pass-through to domestic inflation depends on the combination between it and the prices of commodities in dollars. When commodity prices rise, the real typically appreciates, driven by a better perception of external accounts and growth conditions,” Mr. Teixeira said.

Bradesco estimates that the recent drop of about 6% in commodities in reais would bring IPCA down by 0.18 pp over the next three months. That help could be even greater. “Taking into account only the recent drop in commodities in reais, and considering a linear pass-through to inflation, it would be down 0.33 pp,” Felipe Wajskop, Marcelo Gazzano and Myriã Bast wrote in a report.

However, as the pass-through to domestic prices tends to be smaller with a stronger real or when the variations of commodities in reais are lower than 8.4%, the impact on inflation would be closer to 0.22 percentage points, the economists wrote. In addition, Brazil’s slow economic growth may encourage companies to try and rebuild their margins instead of passing on cost reductions to consumers, they say. “Thus, the 6% drop in commodities prices in reais would result in a 0.18 pp relief for the IPCA.”

The study by MCM also sought to find “nonlinearities” in the exchange rate pass-through. Mr. Teixeira concluded that the pass-through depends on the output gap (a measure of economic slack), and is more intense when it is positive – in other words, when activity is above the potential GDP. Using data from 2002 to 2019, he estimated 0.44 pp of relief on the IPCA in case of an exchange rate 10% lower. The impact would be 0.75 percentage points if the economy was overheating, and 0.22 points in the opposite case.

Another nonlinearity seen is related to the exchange rate. When the real loses ground against the dollar, the pass-through is stronger. If the opposite occurs, the relief on prices is smaller. According to MCM’s calculations, a 10% depreciation of the exchange rate results in a 0.66 percentage point pass-through, while the opposite reduces inflation by only 0.16 pp.

“All this suggests that the current exchange rate appreciation is expected to have a limited impact on inflation, especially because the prices of commodities in reais have not fluctuated so much,” Mr. Teixeira said. In the same vein, Bradesco economists say that “global inflation remains under considerable pressure, and as long as there is no greater relief from commodities in reais, the effect of the appreciation will be limited.”

Marco Maciel — Foto: Silvia Zamboni/Valor
Marco Maciel — Foto: Silvia Zamboni/Valor

In last December’s Inflation Report, the Central Bank calculated that an exchange rate variation of 10% causes an effect of up to 1.1 percentage point on the IPCA, recalled economist Marco Maciel, a partner at Kairós. Using as parameters an exchange rate that went to R$4.9 to the dollar from R$5.3 – a variation of almost 8% – and the pass-through modeled by the monetary authority, he estimated that the relief on the IPCA in 12 months totals 0.83 percentage point. “I think that a good part of the economists underestimates the effect calculated by the Central Bank,” he said.

This range is explained, Mr. Maciel said, by the fact that exchange rates at R$5.70 to or R$4.60 to the dollar, as seen this year, are likely to be outliers. All other things being equal, the economist calculates a pass-through of around 0.7 percentage points, which, considering the same range of exchange rate variation, brings the IPCA down by 0.53 points.

The point is that, as the exchange rate appreciates during the year, the price of commodities rises. “When I put these effects together, an exchange rate variation of 10% would have an impact of 0.4 percentage points on inflation. So that 8% drop in the exchange rate means 0.3 pp on the IPCA,” Mr. Maciel said. With that in mind, he projected 2022 inflation at 7.8% rather than 8.1%. “But the impact of the exchange rate appreciation is relatively small in my projection.”

Besides the level of activity, the volatility of the exchange rate itself – which Mr. Maciel says is high – is a complicating factor for pass-through. “There was a strong devaluation [of the real] in the last two years. Then it suddenly appreciated, and now it has started to depreciate again. Volatility matters and tends to impact inflation. If you passed on to the chain an exchange rate increase to R$5.2 to the dollar and the rate went back to R$5, you will pass it on again, but not the whole difference,” said Lucas Godoi, an economist at GO Associados.

Gustavo Arruda, BNP Paribas’s head of research for Latin America, highlighted another factor. According to him, the fact that inflation expectations lost their anchors in Brazil also influences the agents’ decision on whether to pass on this improvement. “The higher exchange rate takes some pressure off the cost, but if agents are not confident about the inflation’s trajectory and about how other costs are going to move, they are less willing to pass on this relief,” Mr. Arruda said.

“Looking at Brazil today, where expectations clearly lost their anchor, impacts such as the current appreciation of the exchange rate are likely to be smaller than expected,” the economist said. That is why he still sees the IPCA at 8.5% this year, even as other risks have diminished, such as that of surging oil prices. “Any return of the exchange rate to R$4.6 to the dollar will not change our minds.”

Source: Valor International

https://valorinternational.globo.com

Analysis: Inflation projected for 2023 poses challenge to Central Bank

inflation expected by the market was 4%, well above the target set for the year, of 3.25% — Foto: Brenno Carvalho/Agência O Globo
inflation expected by the market was 4%, well above the target set for the year, of 3.25% — Foto: Brenno Carvalho/Agência O Globo

Central Bank’s Focus survey of market expectations, which was released Tuesday morning, was more or less within the expectations, but the high inflation projected for 2023 poses a challenge for the Monetary Policy Committee (Copom).

The inflation expected by the market was 4%, well above the target set for the year, of 3.25%, on a horizon that is the main target of monetary policy.

The Focus Survey is not surprising because informal surveys carried out by the market during the Central Bank civil servant’s strike, when these statistics ceased to be released, also pointed to inflation around 4% in 2023.

But the distance of the projections from the target, 0.75 percentage points, is very large. The additional dose of interest to bring this projected inflation to the target is significant. Each 0.26 percentage point drop in inflation requires an additional 100 basis points of interest rate tightening.

These inflation projections take into account the policy interest rate Selic rate of 13.25% per year at the end of the monetary tightening cycle. Therefore, to bring inflation to the target in 2023, it would be necessary to raise interest rates to a little more than 16% a year. Nobody thinks that the Central Bank will do this. The highest Selic rate projected by the market is 14.25% per year.

When calibrating monetary policy, the Central Bank does not need to follow market projections exactly. What counts is the Copom’s own projection, made with its own models. In the March meeting, the Copom reached an expected inflation close to the 2023 target, of 3.25%, while the market was already projecting 3.7%.

However, with the new rise in market inflation expectations, it is more difficult for the Central Bank to maintain its inflation projection around the target. Economic analysts are increasingly questioning the Central Bank’s forecasts, which have rarely strayed so far from the expectations contained in the Focus survey.

There are some factors that could make the Central Bank’s projection fall short of Focus expectations, but not that much. One is the exchange rate. The monetary authority works with the prospect that the rate will remain basically stable at current levels (it was over R$4.9 to the dollar on Tuesday), while the market considers a median rate of R$5 for the end of this year.

The good news for the Central Bank is that, despite the worsening of inflation expectations for 2023, market projections for the following year remained stable at 3.2%. The percentage is above the target of 3%, but the fact that it has not worsened (keeping it somewhat immune from the more general deterioration in the inflationary scenario in the short term) is still positive.

The market has also not increased much its projection for the interest rate at the end of the tightening cycle. Tuesday’s Focus survey shows it at 13.25%. What has increased the most is the interest rate forecast for the end of 2023. In March, it was 8.25%, and now it is 9%.

In other words, the overall Focus projections say that the market does not really believe that the Central Bank will pursue the 2023 target. Because of this, the inflation projected for next year is well above the target, and the final breath of this monetary tightening cycle is relatively restricted.

But, on the other hand, analysts think that the Central Bank will manage to have good control of inflation in 2024, if it postpones the monetary easing cycle planned for next year.

Source: Valor International

https://valorinternational.globo.com

Prices of imported goods surge, drive inflation

The average prices of imported goods are rising fast and on a widespread fashion in early 2022. Average import prices rose 32.8% year over year from January to March, while the volume of foreign purchases fell 4.3%. The rise in import prices was relatively generalized, with a 53.1% rise in commodities and a 30.8% rise in non-commodities, raising concerns about the effects on domestic inflation.

Imports totaled $60.5 billion in the first quarter, up 27.1% in the same comparison, according to official data. The data are from the Foreign Trade Indicator (Icomex), expected to be released this Tuesday by Fundação Getulio Vargas’s Brazilian Institute of Economics (FGV/Ibre).

Although the Secretariat of Federal Revenue strike may have affected the release of foreign trade figures for the first quarter of the year, specialists see effects mostly caused by prices rather than volume, both for exports and imports.

The conflict in Eastern Europe, they wrote, will probably delay the price increase expected for 2022. The global scenario of price pressure, they added, includes an interruption of export deflation by Asia, a pandemic and a restructuring of production chains that may also result from a reorganization of European countries in order to become less dependent on Russian inputs.

Lia Valls — Foto: Leo Pinheiro/Valor

Lia Valls — Foto: Leo Pinheiro/Valor

, a researcher at Ibre, stressed that imports in the first three months of the year show a different behavior from the same period last year. In the first quarter of last year, according to data from Icomex, the volume imported increased 8.5% while prices fell 3.1%. In 2021, she said, imports were boosted in the first half by an increase in volumes while prices accelerated their pace in the second half. In the year, the recovery of domestic demand contributed to an increase of 21.9% in the volume of imported products, with an increase of 13.1% in average prices.

For this year, she says, the scenario is likely to be different. “The imported volume is not expected to see a big boost this year as the economy is seen as slowing down,” she said. The different element in relation to the pressure of imported prices on domestic inflation is the appreciation of the real at the beginning of 2022, she highlights, unlike what was seen during last year. Given the uncertainty of the exchange rate, however, says the economist, the appreciation of the real is a development unlikely to continue.

The data from the Foreign Trade Secretariat (Secex/ME) also show a price acceleration in imports in the first quarter, with a 29.8% rise in prices compared with the same period last year. Volumes dropped 2.2% in the same criterion. In March, prices rose 29.5% with a diffusion index of 67.68, also indicating that the upward price trend was disseminated.

The acceleration of prices caused imports to expand at a pace unrelated with domestic demand, said Yasmin Riveli, an economist at Tendências. She points out that import prices in the first months of the year continued to be subject to high freight costs and were driven, among other items, by fertilizers and fuels.

Livio Ribeiro, a partner at BRCG consultancy and also a researcher at Ibre, says there is a “lockdown war” scenario, with disorganization of activities and impact on the price structure of Brazilian imports. He says that this impact goes beyond the more visible effects of the Russia-Ukraine war on commodity prices, such as wheat and oil.

The global scenario of price pressure includes the interruption of a longer process of Asian deflation exporting, a phenomenon that dates back to 2019, with the trade war between the United States and China, Mr. Ribeiro said. Since then, he said, all the productive linkages that led Asian countries to flood the world with cheap “tradable” goods began to be lost.

The slowdown in Asian deflation export, says the BRCG partner, happened as a result, among other factors, from the displacement of Chinese production to other countries to the adoption of a strategy of less dependence on American supply.

These are costly processes at the time of implementation, he highlights, and that had already led to a change in the global production chain structure. Production models set up for decades and that were considered efficient from an economic standpoint changed because they were no longer efficient from a strategic standpoint, he said.

In addition to this phenomenon since the beginning of 2019, there was a pandemic that shuffled everything around, and since then successive shocks, including tighter lockdowns, and on top of all that came the war in Ukraine, the economist says.

“All of this suggests that at least for some time, until the production chains reorganize themselves, we are going to have higher prices. That certainly won’t be solved by the end of this year.” There is a realignment in the prices of tradable industrial goods in the world, which impacts Brazilian imports due to its composition and also due to the country’s industrial structure.

The reading of industrial goods within Brazil’s benchmark inflation index IPCA released by the Brazilian Institute of Geography and Statistics (IBGE) shows the impact of import prices of intermediate goods and final industrial goods on domestic prices, Mr. Ribeiro said. Since the middle of last year, he recalled, the monthly reading is at the peak of the historical series since 2012 and earlier this year there have already been monthly records in the first three months. In March, industrial goods inflation within the IPCA reached 1.21%.

Mr. Ribeiro points out that the result of Russia’s invasion of Ukraine will lead to a structural change, no longer to a cyclical one. Global value chains and logistics were not going to stay disorganized forever. “They were going to get organized at a certain time and a certain price eventually.”

But what we see now is a major player in the world, Europe, changing its production chaining as a matter of geopolitics, he said. European countries will seek to become less dependent on inputs from Russia, he added, which will lead to a new balance. “It is no longer a matter of waiting for a shock, even a prolonged one to pass. There is a change in the way of doing so that will impact the global productive chain.”

The productive structures created over the last 25 years, Mr. Ribeiro points out, are going through changes. In the first round, it was due to the trade war between the United States and China. In the second one, by the desire for strategic protection of production due to the impacts of Covid-19 on the productive chain. Now, in the third round, he says, by geopolitical issues triggered by the Russia-Ukraine conflict.

Source: Valor International

https://valorinternational.globo.com