Financial market raises to 2.29% projection of economic growth in 2023

The financial market forecast for the growth of the Brazilian economy this year rose from 2.26% to 2.29%. The estimate is in today’s (14) Focus bulletin, a survey published weekly by the Central Bank (BC), in Brasília, with projections for the main economic indicators.

For next year, the expectation for the Gross Domestic Product (GDP, the sum of goods and services produced in the country) is for growth of 1.3%. In 2025 and 2026, the financial market projects GDP growth of 1.9% and 2%, respectively.

The forecast for the Extended National Consumer Price Index (IPCA) – considered the country’s official inflation – was also maintained at 4.84% this year, the same as last week. For 2024, the inflation estimate was increased from 3.88% to 3.86%. For 2025 and 2026, forecasts are 3.5% for both years.

The estimate for this year is above the ceiling of the inflation target that must be pursued by the Central Bank. Defined by the National Monetary Council (CMN), the target is 3.25% for 2023, with a tolerance interval of 1.5 percentage points up or down. That is, the lower limit is 1.75% and the upper limit 4.75%. According to the BC, in the last Inflation Report, the chance of official inflation exceeding the target ceiling in 2023 is 61%.

The market projection for 2024 inflation is also above the center of the forecast target, set at 3%, but still within the tolerance range of 1.5 percentage points.

In July, influenced by the increase in gasoline prices, the IPCA was 0.12%, according to the Brazilian Institute of Geography and Statistics (IBGE). The rate was above those observed in the previous month (-0.08%) and in July 2022 (-0.68%). With the result, the official inflation accumulated 2.99% in the year. In 12 months, inflation is 3.99%, above the 3.16% accumulated until June.

Interest rate

To achieve the inflation target, the Central Bank uses the basic interest rate, the Selic, as its main instrument, set at 13.25% per year by the Monetary Policy Committee (Copom). Faced with the sharp drop in inflation, the Monetary Policy Committee (Copom) of the Central Bank, this month, started a cycle of reducing the Selic rate.

The last time the BC had reduced the Selic was in August 2020, when the rate dropped from 2.25% to 2% per year, amid the economic contraction generated by the covid-19 pandemic. After that, the Copom raised the Selic rate 12 consecutive times, in a cycle that began in March 2021, amid rising food, energy and fuel prices, and, as of August last year, maintained the rate at 13.75% a year for seven consecutive times.

For the financial market, the expectation is that the Selic will end 2023 at 11.75% per year. By the end of 2024, the estimate is that the base rate will drop to 9% per annum. For the end of 2025 and 2026, the forecast is for Selic at 8.5% per year for both years.

When the Copom raises the basic interest rate, the purpose is to contain heated demand, and this affects prices because higher interest rates make credit more expensive and stimulate savings. But, in addition to the Selic, banks consider other factors when defining the interest charged from consumers, such as the risk of default, profit and administrative expenses. Thus, higher rates can also make it harder for the economy to expand.

When the Copom decreases the Selic, the tendency is for credit to become cheaper, with incentives for production and consumption, reducing control over inflation and stimulating economic activity.

Finally, the financial market forecast for the dollar is at R$4.93 by the end of this year. By the end of 2024, the forecast is that the US currency will remain at R$ 5.

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