Combating inflation in Brazil worked better than in other countries

Brazil is achieving better results in combating inflation than other emerging and developed economies.

The country was the second in Latin America to start the cycle of falling interest rates, behind only Chile. In early August, the Central Bank’s Monetary Policy Committee (Copom) reduced the Selic rate from 13.75% to 13.25% per annum. The decision was endorsed by BC president Roberto Campos Neto, who cast the final vote.

He has highlighted, in presentations made at business entities and financial institutions, that the BC has been working to smooth fluctuations in economic activity and foster employment.

On Thursday (31), the Brazilian Institute of Geography and Statistics (IBGE) announced a slight drop in the unemployment rate, from 8% to 7.9% from June to July – the lowest rate for that time of the year. year since 2014.

The strategy conducted by Campos Neto is the target of frequent criticism from President Luiz Inácio Lula da Silva (PT) and figures close to him. To use a recent example: last Tuesday (29), the Minister of Mines and Energy, Alexandre Silveira, said that it is necessary to reduce interest rates so that the country can grow and generate jobs and income. Detail: he said this at a hearing in the Chamber of Deputies, whose main theme was the blackout of August 15th.

In Brazil, attenuated impact

A presentation given by Campos Neto shows that, while in most countries the drop in inflation – motivated by the rise in interest rates – was accompanied by a retraction in growth, Brazil managed to reduce price indices with an attenuated impact on economic activity.

In the presentation, Campos Neto points out that Brazilian inflation in 12 months fell by 8.7 percentage points between June 2022 and 2023. The impact on GDP was mild. In the second quarter of 2022, GDP had grown by 3.7% over the same period of 2021. Now in 2023, annualized growth in the second quarter was 3.4% – a loss of 0.3 percentage points in one year, therefore.

This scenario was worse among American emerging countries, such as Chile, Colombia, Mexico and Peru. On average, inflation fell less in this group of countries (1.9 percentage points), while the economy contracted by an average of 5.3 percentage points.

In developed economies, considering the countries of the euro area, Canada, the United States and the United Kingdom, inflation four percentage points, on average, while the annualized GDP shrank by 2.4 percentage points.

Latin America starts interest rate cuts at a stronger pace

The movement to cut interest rates worldwide began, at a strong pace, in Latin America, with Chile, Brazil and Uruguay taking the first steps. “The pace and magnitude of the reductions will depend on domestic and external factors”, point out analysts at XP Investimentos.

The main factors that will influence central bank decisions in the coming months are:

• economic data;
• the fiscal response to the slowdown in activity;
• how the global economy behaves and the impacts on commodity prices and the exchange rate; It is
• the evaluation, by the central banks, of the neutral interest rate (the one that does not contribute to the expansion or retraction of the economy).

They say that monetary policy appears to be at an inflection point across the world, albeit with regional differences. “However, an expansionary level is not expected anytime soon, since the risks to inflation have not disappeared”, they point out.

Interest rate cut advances more vigorously in Chile

Monetary policy easing is most advanced in Chile. The interest rate cut began in July, with a reduction of one percentage point in the reference rate. A new decrease, probably of this magnitude, is expected for September, which would bring the Chilean basic rate to 9.25% per annum.

XP Investimentos assesses that the disinflation process is occurring more quickly in the Andean country. One factor that favors a more aggressive monetary policy is that it has a neutral real interest rate estimated at 1% per year.

But even with this more favorable scenario, the Chilean GDP should shrink by around 0.5% this year. It is a different reality from the main Latin American economies, with the exception of Argentina.

Peru should be the next to join the “club”

The next country that could join the “club” of countries that are reducing interest rates is Peru. XP expects this to happen in September.

Peruvian 12-month inflation has fallen sharply in recent months, dropping from 6.5% in June to 5.9% in July.

Another factor contributing to the drop in interest rates in Peru is the sharp slowdown in economic activity. In August, Itaú revised its GDP growth forecast for this year from 1.4% to 0.8%.

The slowdown is also driven by “El Niño”. The climate phenomenon, which warms the waters of the Central Pacific, affects rainfall in the region and has an impact on fishing activity, which is important for the Peruvian economy.

Mexico and Colombia on hold

Two countries that are waiting for a drop in interest rates are Mexico and Colombia. In these two countries, the reduction of inflation has been slower. XP assesses that the cut could start in October in the South American country and in November in the North American one.

In Mexico, the reduction of inflation has been slower. It dropped from 5.1% a year in June to 4.8% in July and should, according to XP’s projections, end 2023 at that level. The food index, which weighed heavily in the last year, is showing considerable signs of easing. Service inflation, however, is “more stubborn” and should take time to give in.

The next data and the positioning of the Fed (the US BC) should determine when Banxico (the Mexican BC) should start cutting interest rates. “Inflationary pressures and the fact that the Fed has not yet declared the end of the monetary tightening cycle could delay this process. Furthermore, resilient economic activity is an additional risk”, cite XP analysts.

Growth expectations for the Mexican economy in 2023 have been increasing in recent months. Itaú raised its estimate from 2.4% in June to 3% in August. It is the same that Banxico projects.

Colombia suffers from very high inflation in 12 months. It is still in double digits (11.8%), although it has already recorded four consecutive declines.

One of the problems is service inflation. The trend is upward, which may make it difficult to reduce the overall index. XP points out that indexation and household consumption are factors that have a negative influence.

On the other hand, the peso (the local currency) strongly appreciated against the dollar and the loss of strength of the economy, which grew more than 7% last year and should expand between 1% and 1.5% this year, could pressure inflation down.

Argentina goes against Latin America

Argentina is going against the grain of other Latin American countries. It was obliged, in mid-August, to raise basic interest rates from 98% to 114%.

Even so, the country has negative real interest rates (after discounting inflation), that is, below inflation. Inflation forecast for this year is 160%, according to estimates by Itaú, one of the highest in the world.

The upward movement in interest rates occurred shortly after the primaries that chose the candidates for the presidential elections in October, and accompanied a 22% devaluation of the local currency against the dollar.

USA, Europe and United Kingdom are experiencing different moments in the fight against inflation

The central economies live different situations. The United States may have stopped the cycle of rising interest rates, while the countries of the Eurozone and the United Kingdom are still expected to register increases.

A point in common between these regions is the persistence of inflationary risks. The job market remains heated in many places. “Thus, monetary policy should remain contractionary in the Western world until central banks are convinced that inflation will return to target,” say experts at XP.

In the largest global economy, the brokerage firm’s assessment is that, even with the Fed having left the doors open for an increase in the basic rate, the trend is to maintain this year.

“It looks like the highest interest rates in decades have started to have an effect on the economy. Despite the weaker data (GDP and job creation) it is worth mentioning that the economy continued to show growth”, adds Avenue’s chief strategist, William Castro Alves.

An eventual rise would depend on a deterioration in conditions. There are plenty of concerns about this: on the one hand, higher fiscal risks, on the other, a more resilient economy. The International Monetary Fund (IMF) projects US GDP growth of 1.8% this year.

XP assesses that the Euro Zone is close to the end of the cycle of high interest rates, but that it will still go through another increase in the rate, since the risks of inflation are greater than the United States.

Even with inflation falling in the United Kingdom – it reached 6.4% in the 12 months ending in July, according to the Office for National Statistics (ONS) – the scenario is different. The rate rose to 5.25% per annum, with expectations to end the year at 6%.