Given the global difficulty of cutting public spending after the flood of stimulus injected during the pandemic, it falls on central banks to keep monetary policy tight to bring inflation back to targets.
The diagnosis, made by the chief global economist of BNP Paribas, Marcelo Carvalho, is valid for both developed and emerging economies, and with inflation still persistent, interest rate cuts in 2023 seem unlikely, while the United States should face a recession already this year.
In his first visit to Brazil after five years, Carvalho evaluates, in an interview with Valor, that the domestic economy should not be supported by robust global growth.
For him, the country has succeeded in establishing a fiscal rule that should bring more predictability to investors, although it is not “perfect”.
And, in the face of a global scenario of a weakening dollar and foreign interest in Brazil, Carvalho is more optimistic about the exchange rate.
The level of R$5 of the dollar seems to have “more of a ceiling than a floor”, evaluates the economist.
INFLATION IN THE US
We had an excess of stimuli that is now being partially reversed. I have no hope of having a big global fiscal tightening in the near future.
It is up to central banks to do the hardest job, which is to de-heat the economy to contain inflation.
In the US, service inflation has started to stabilize, but we expect it to fall slowly, not least because it takes time to de-heat the labor market and contain wages.
The disinflation process will be much more difficult from now on.
CENTRAL BANKS
Our perception is that inflation in the coming years will be structurally higher, leading central banks to adopt a more cautious stance because they have the mandate to bring inflation to the target.
Thinking about the Fed, specifically, it is probably coming to an end.
The interest rate is already 5.25%, and we don’t think the Fed will go any higher. It is possible that it will have a 0.25-point increase in interest rates in June, but the most likely scenario in our projection is that interest rates will stay where they are.
The European Central Bank (ECB) and the Bank of England (BoE) are also close behind.
The ECB has more work to do and should raise interest rates two more times by 0.25 point, and the BoE should have one last 0.25-point interest increase.
FALLING INTEREST RATES IN THE WORLD?
Although we are near the end of the monetary tightening cycle, we are far from the beginning of the loosening cycle.
In other words, we don’t think that central banks will cut interest rates before next year.
The market is very anxious, and the yield curve is already pricing in cuts much earlier than this.
In the case of the Fed, already in September. We think that this is not the most likely scenario.
GLOBAL DECELERATION
I don’t think these central banks are hurrying to cut interest rates.
They seem to want to be comfortable that inflation is indeed giving way and that the economy is adjusting.
No central bank wants to be mean, but when you look at the labor markets, you have to de-accelerate the economy because accelerating wages is not consistent with the inflation target.
Our projection for the US is for a moderate recession starting in the third quarter.
We do not see anything dramatic.
And, in Europe, we think that the situation is hitting the crossbar but that it is not a recession.
In China, the reopening is for real, and the first quarter figures confirmed this very strong activity.
The other side of the coin, however, is that today the sustainability of this recovery is being questioned.
It is necessary to consider the composition of Chinese growth, not least because it impacts the rest of the world, especially on commodity prices.
WEAKNESS OF THE DOLLAR
From the global point of view, we think that the dollar is very strong and should weaken in the coming quarters – partly because of the macro context with the US economy slowing down more than the rest of the world and interest rates stopping rising there.
Brazil is part of the rest of the world, and this helps the real to appreciate.
The perception of foreign investors in relation to Brazil is certainly more favorable than that of local investors.
Fundamental factors play in favor of Brazil, and this helps to explain the support we have seen in the exchange rate.
In relative terms, Brazil is not doing too badly in the picture.
Our official projection for the exchange rate at the end of the year is R$5 [per dollar] and R$4.90 at the end of 2024.
And I would say that these R$5 today look much more like a ceiling than a floor.
SELIC
Inflation has been giving way, but the core is still too high; Brazil’s Central Bank has already raised interest rates a lot, but it will be very cautious when cutting them.
I think the Central Bank here will only start cutting interest rates when it feels comfortable and confident that inflation is converging toward the targets sustainably.
I don’t think CB is in a hurry to cut interest rates.
Of course, interest rates are high, and the next move will be a cut, but in our view, this will be much more visible heading into next year rather than in the near term.
FISCAL FRAMEWORK
The bad news is that it could be better. The good news is that it could be worse.
It is good that it has some references and is not unbridled spending.
But honestly, you are not attacking Brazil’s fiscal problem, which is spending.
Brazil spends too much and spends badly.
At some point, the discussion about Social Security will have to be taken up again, as well as administrative reform.
The framework is the marriage of spending promises with hopes for revenues.
It is not rapid growth that will bring more revenue but a higher tax burden.
My impression is that, in the medium and long term, the framework plays against the economy’s potential growth.
With information from Valor
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