Inflation expectations stop getting worse – 07/03/2023 – Vinicius Torres Freire

Inflation expectations have stopped rising since the final third of February. Projections for 2023 and 2024 are at a high level. Inflation of 5.8% over the next 12 months is still chipping. There may be a reversal in the estimates in days or even hours, but a fortnight ago, around, the pessimism stopped increasing.

There has even been a minuscule easing in short-term interest rates, a year or less (longer-term rates are at horrendous levels). Anyway, economists and managers of big money from “the market” have not yet subscribed to the Central Bank’s suggestion that the Selic should remain in the stratosphere of 13.75% until the New Year. For the group, the Selic starts to drop in early November or even in September. There are risks, domestic and external — more resilient inflation in the rich world could sour the situation.

It’s a truce in a very bloody battle. These projections are due in part to the fact that the economy is slowing down. It’s a similar situation to taking a day off because of a bad flu.

This relative relief is an opportunity for the government to try to turn the game around, after scoring so many own goals since even before taking office, starting in November.

The “market” did not buy the idea that the Selic, the economy’s basic rate, should remain at 13.75% until the end of the year. At the median of estimates, the Selic ends 2023 at 12.75% per year. For Itaú economists, at 12.5%. For those from Bradesco, at 12.25%.

This is no improvement over the situation at the beginning of November. That was when Luiz Inácio Lula da Silva began to undermine the idea of ​​controlling increased spending and the Central Bank.

So, the inflation expectation of “the market” was lower and the Selic was expected to end 2023 at 11.25%. For the end of 2024, the projection was 8%, already at a level that would stimulate growth in 2025, everything else constant

There also seems to be some faith (sic) in Fernando Haddad. That is, the hope that the Minister of Finance contains impetus for resuming Dilma’s ideas 1. The debt containment plan that Haddad promises to present this month may contribute to easing the monetary squeeze (which does not depend only on the BC, but of the disposition of the owners of money to lend and to keep their resources in reais).

On the other hand, the struggle in the PT government is still intense, in particular between Gleisi Hoffmann, president of the PT and Lula’s talking cricket, and the Treasury.

For example, as reported by this Sheetthe BNDES has a plan to return to lending at subsidized rates (below market rates), although the current project is quite different from Dilma’s cash fest1.

It is not known when there will be a subsidized loan, nor how much, which would have some (negative) impact on market interest rates. It would take a while for the practical effect to show up. However, the financial environment is more sour with these appearances of the usual suspects (bad taxes, like exports, disproportionate interventions in prices, like in Petrobras, in interests, like in BNDES, etc.).

It is not as easy to dismiss the idea of ​​subsidized lending as standard, conventional, or ludicrously orthodox economists do. However, the Brazilian economy is so full of distortions, both tax and regulatory, that it is difficult to determine when a subsidy is worthwhile. Furthermore, leaving the decision to subsidize only in the hands of the government increases the risk of screwing up.

It is possible to imagine alternative policies, in a measured way, since you are dealing with a patient in a critical condition —the economy of this country. In the short term, it remains more important to stabilize the patient and improve his reactions.

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