RIO DE JANEIRO, BRAZIL – Itau Unibanco has maintained its projections for the exchange rate at the end of 2021 and 2022, with fiscal and pandemic-related risks offset by higher interest rates and commodity prices, but now sees higher economic growth and inflation as the impact of the second wave of Covid-19 has been less pronounced.
In a monthly review, the bank considered that there are signs of a slowdown in the second wave of the coronavirus, amid the progress of vaccination, particularly among the population most at risk. But it considered that health systems are still under pressure and that there are risks related to the emergence of new variants, vaccine efficacy, and the delivery of raw materials and immunizers from abroad.
These factors continue to influence the exchange rate, although mitigated by the effects of the high SELIC rate and the appreciation of raw materials – which has raised the terms of trade.
According to Itaú, monetary tightening is starting to be reflected in more favorable trade and financial flows, making room for appreciation of the Brazilian currency in the short term.
“(But) for 2022, the global scenario of stimulus withdrawal, higher interest rates and a stronger dollar tends to pressure the Real (R$) and other emerging currencies,” said the bank’s economic research team, headed by Mario Mesquita.
Itaú expects the dollar to reach R$5.30 at the end of 2021 and R$5.50 at the end of 2022. The currency was trading at around R$5.21 on Friday. The bank also expects the SELIC to reach 5.50% per annum in December this year.
While the foreign exchange scenario has remained largely unchanged, in the economy Itaú now expects higher growth chances for the year and has revised its projection to 4% (from 3.8% before), with signs of recovery in the service sector last month as several states relax restrictions on mobility and the operation of commercial and service businesses.
“As we expected, the impressive growth of the global economy and the expected reduction in the savings rate of Brazilian families mitigate the negative impact of the reduction in disposable income on demand.”
For 2022, the bank maintained its 1.8% growth projection, with a lower burden coming from 2021 and an expected reduction in stimulus in Brazil and worldwide.
The strength of agricultural commodities – which helps explain the recent appreciation of the Real and helps economic growth – is the argument mentioned by Itaú to revise the inflation projection for this year from 4.7% to 5.3%. The recent market activity with climate uncertainty over the coming months and the red tariff flag on electricity bills for December 1st (previously yellow) also influenced the adjustment.
In 2022, inflation will slow down to 3.6%, with the unemployment rate still above the neutral level. “The main risk is the lack of support for inflation expectations from families and companies,” concluded the bank.