Brazil government estimates mid-year inflation peak of nearly 7%

RIO DE JANEIRO, BRAZIL – Economy Minister Paulo Guedes’ calculations indicate that in June the Broad Consumer Price Index (IPCA) will reach this year’s peak. According to the Minister, official inflation will reach 6.7% in the period, and could be as high as 7%.

The Economy Ministry head believes that the Central Bank, under Roberto Campos Neto, will take action looking at the whole inflationary scenario in order to prevent uncontrolled inflation. The government expects the rate to end the year below its peak, at 4.4%, but above the target center of 3.75%. This Central Bank intervention began on Wednesday, March 17th, when the COPOM decided to increase the SELIC rate to 2.75%.

The basic interest rate, currently at 2%, is kept at low levels due to the need for stimulus packages due to the pandemic. But, based on high inflation, it is believed that adjustments are needed. The financial market had been betting on a 0.5 percentage point hike in the basic rate – the first increase since 2016 – considering inflation behavior.

Concerns over an inflation rate above the target range have prompted several government discussions, including the renewal of emergency aid.  The justifications involve the resumption of consumption from an expected pandemic control, and the expectation of little adherence to isolation measures by the population.

Read: Will Brazil see a 75 basis-point Selic hike in March?

The negative inflation registered between April and May last year is also considered by the Minister. He says that the rates recorded at the time of greatest restriction on circulation and consumption caused the inflationary spike recorded in late 2020.  Currently, the financial market is projecting an IPCA of 4.60%, above the official inflation rate for 2020, of 4.52%.

However, the Central Bank is not the only one responsible for controlling price increases. Guedes reiterates his formula for controlling expenses and stabilizing investors’ expectations by implementing reforms and privatizations.

He says that the end of emergency programs designed last year conveyed the federal government’s concern with the country’s fiscal situation.

“If we gave the aid, purely and simply, we would have two reasons for the high inflation,” he reiterated to deputies and senators, to justify the need for passing the Emergency PEC (Proposed Constitutional Amendment). “You grant the aid to help the poorest and end up hurting precisely those who need to buy food.”

Source: Veja