Economists cut 2023 inflation forecast to within the target band

For the first time in the Central Bank’s weekly polls, market analysts’ 2023 year-end inflation forecasts made the government’s target band — with the median prediction at 4.75 percent, and the band’s upper limit down from 4.86 percent the previous week.

Brazil’s inflation target of 3.25 percent, with a tolerance band of ±1.25 percent, is set by the National Monetary Council (a three-person body formed by the Central Bank chairperson and the Ministries of Finance and Planning). These forecasts are closely monitored by financial institutions, as they can influence decisions made by the Central Bank’s Monetary Policy Committee.

For Alexandre Espírito Santo, chief economist at investment firm Órama, the lower forecasts reflect a more benign inflation outlook for the country.

Brazil’s 12-month consumer price index rose by 5.16 percent in September — the third consecutive increase in the last three months. But the uptick requires context. Inflation rose below expectations. Key measures of consumer prices, such as food inflation, are cooling. And inflation diffusion has dropped — meaning that fewer product groups are getting more expensive.

Fuel prices were actually the main inflation drivers last month. João Savignon, head of macroeconomic research at investment management firm Kínitro Capital, argues that the current spike in fuel prices at the pump is “mainly connected to the former Jair Bolsonaro administration’s decision to cut consumption taxes on fuels and telecommunications last year.”

Food inflation has decelerated every month for the past 10 months, from an annual hike of 11.84 percent in November 2022 to a modest increase of 0.88 percent last month.

“We continue to see benign inflation dynamics for the next few months, with some acceleration in food-at-home and resilience in services inflation towards year-end, basically driven by seasonal factors,” investment bank BTG Pactual wrote in a note to clients.

Additionally, economists surveyed by the Central Bank have maintained a steady inflation outlook for the next three years. They project a rate of 3.88 percent for 2024 and 3.50 percent for both 2025 and 2026. This consistency in long-term projections reflects a degree of caution, suggesting that while current trends are favorable, uncertainties persist.

One key concern is that fuel inflation could continue to rise, especially following the eruption of conflict between Israel and Hamas, the militant group that controls the Gaza Strip and that launched an assault on Israeli territory last week. 

“The real challenge is determining how oil prices will be affected by the conflict in Israel and the surrounding region, which will allow us to infer how Petrobras will respond regarding fuel,” says Mr. Espírito Santo.

Market analysts have also maintained stability in their GDP growth expectations for this year, predicting a 2.92 percent expansion. Projections for 2024 remain unchanged at a 1.5 percent growth rate. 

Additionally, expectations around Brazil’s foreign exchange rate remain less than bright. Markets expect the greenback to be worth BRL 5 by the end of the year — a threshold that has been surpassed regularly since the pandemic.

A weaker Brazilian real, however, may not be entirely due to the market skepticism around Brazil. When American rates are high, the dollar grows stronger because Treasury yields become more attractive. Chinese economic hiccups are another concern. As Brazil’s outright top trading partner, if the Asian giant starts to buy less oil, grains, or beef, this could be a major problem for Brazil.

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