How far does Selic go? Inflation rising to 2023 doesn’t stop finish of cycle, economists say
- August 22, 2022
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Inflation expectations for 2023 and 2024 have risen, but should not interfere with the BC’s end-of-cycle trajectory
With inflation projections falling for this year, but rising for 2023 and 2024, the interest rate scenario should remain in double digits for more than a year – even with the Central Bank moving towards ending its upward cycle.
The possibilities for next year, amid the electoral period and uncertainties on the radar, were discussed by economists during a debate this Thursday, 18, at Macro DayBTG Pactual event (from the same control group as EXAM).
The panel was attended by Eduardo Loyo, partner at BTG Pactual, Tiago Berriel, chief strategist, Mansueto Almeida, chief economist, and Stefanie Birman, partner and strategist at the bank.
Birman pointed out that the market is pricing in a cut cycle taking interest rates to 10.5% in 2024, but that there are doubts about the trajectory of next year – with fiscal risk, elections and uncertainties in the global scenario.
“Inflation comes from a very high level and at the ‘end of time’ we will reach the nominal interest rate around 7% — if the equilibrium real interest rate is around 4% and the inflation target is 3%” , said Berriel, chief strategist at BTG Pactual, about the Brazilian scenario. “But the way there tends to be painful.”
Eduardo Loyo stated that disinflation could “be slower” than expected with expectations not anchored as they are today.
But he also states that the BC is not expected to delay the start of the low interest rate cycle because of projections rising for inflation in 2023 and 2024.
“It would be better if they [expectativas de inflação] were well anchored”, he said, but stated that he does not believe that the BC should wait for inflation to actually enter a downward trajectory before starting the interest rate cut cycle.
“I think it is possible to live with some deterioration of this type, and when the results emerge […], are transmitted through the economy, expectations are anchored again”, he said. “The big risk is that we will either have a fiscal mess that is much bigger than what we anticipate or have some other exogenous shock that takes on a very different dimension from what we are already seeing.”
The expectation is that the monetary tightening of the BC should start to affect inflation, especially in the second quarter of this year, improving the horizon of projections.
For now, Brazil had deflation of 0.68% in July and should have another price drop in August, but this movement was driven, for now, by the exemption of fuels and the drop in the price of oil in the international market.
What to Expect from the 2023 Tax Rule
Mansueto Almeida, chief economist at BTG Pactual, says that Brazil is ending the government with a positive “fiscal surprise”, due to a surplus of around R$90 billion — after a surplus of R$65 billion in 2021, even coming from a deficit in 2020. “In short-term data, it is very positive”, he said.
The challenge, according to the chief economist at BTG, is that the debt will enter a growth trajectory next year, with tax relief this year. He pointed out that it is still unclear — with the election campaign — what the fiscal rule will be after the election.
If programs such as the Auxílio Brasil in R$600 and the exemption of federal taxes on fuels are maintained in 2023, expectations may be reconsidered.
“The fiscal can, yes, disturb the monetary”, concluded Mansueto, affirming that the yield curve can rise much more after the election, or fall, depending on what happens from January onwards.
The economist defended that the current spending ceiling, in his opinion, would be the ideal framework. He believes that the tax burden “is already very high” and that it is difficult to find space for spending that eases the short-term ceiling for investments, for example.
“We don’t know exactly if the market will believe in another type of rule in which you only see the effect in the long term”, he said. Mansueto argues that a possible scenario would be annual fiscal indicators, such as primary result rules, arguing that his preferred model of fiscal rule would include a combination of “some expenditure control and primary target”.