Brazil Inflation Projection for 2020 Climbs Slightly to 3.25 Percent

RIO DE JANEIRO, BRAZIL – The financial market has raised the inflation estimate for this year. The projection for the Broad National Consumer Price Index (IPCA) rose from 3.20 to 3.25 percent, according to the Focus bulletin, a publication released every week by the Central Bank (BC), with the projection for the main economic indicators.

This was the 14th consecutive increase in the estimate. For 2021, the inflation projection rose from 3,17 to 3,22 percent, in its fourth consecutive increase. The projection for 2022 and 2023 remained unchanged: 3,50 and 3,25 percent, respectively.

The 2020 projection falls below the center of the inflation target that should be pursued by the Central Bank. The target, as set by the National Monetary Council, is centered at four percent in 2020, with a tolerance interval of 1.5 percentage points up or down. In other words, the lower limit is 2.5 percent and the upper limit 5.5 percent.

For 2021 the target is 3.75 percent, for 2022 it is 3.50 percent, and for 2023 it is 3.25 percent, with an interval of 1.5 percentage points up or down each year.

Selic

To reach the inflation target, the Central Bank uses the basic lending interest rate, the SELIC, as its main instrument, currently at two percent per year.

Financial institutions expect the SELIC to close 2020 at two percent per year. The last 2020 meeting of the Monetary Policy Committee (COPOM), responsible for setting the SELIC, is scheduled for December.

For the end of 2021, the basic rate is expected to reach 2.75 percent per year. For the end of 2022 the projection is 4.5 percent per year and for the end of 2023 it is six percent per year.

When the COPOM reduces the SELIC, the trend is for credit to become cheaper, encouraging production and consumption, reducing inflation control and boosting business activity. However, banks consider other factors when defining the interest charged to consumers, such as risk of default, profit and administrative expenses.

When the COPOM raises the basic interest rate, the goal is to contain heated demand, and this has an impact on prices because higher interest rates render credit more expensive and encourage savings.

And when the SELIC is maintained, the COPOM considers that earlier adjustments were enough to keep the inflation under control.

Business Activity

The financial market projection for the Brazilian economic decline this year was adjusted from 4.80 to 4.66 percent. For next year, growth expectations were maintained at 3,31 percent. For 2022 and 2023, the financial market continues to project a 2.50 percent GDP growth.

Dollar

The projection for the year-end dollar rate has dropped from R$5,45 to R$5,41 this year and was maintained at R$5,20 for 2021.