Market raises inflation expectations to 6.56% and sees Selic at 7% in 2021 – Prime Time Zone

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Central Bank sources raise the IPCA estimate for the 16th week in a row; GDP and exchange rate projections are also changed upwards

Pixabay/Creative CommonsFinancial market raises expectations again with inflation amid rising prices for commodities and electricity

O financial market again raised expectations for inflation, interest rates, economic recovery and exchange rate in 2021, according to data from Focus Bulletin released this Monday, 26. The median of the Central Bank survey carried out with more than 100 institutions pointed to an increase of 6.56% of the Broad Consumer Price Index (IPCA), the official indicator of brazilian inflation. This is the 16th week following the elevation of the projection. Last week, the forecast indicated the increase of 6.31%. The BC pursues the inflation target of 3.75%, with a margin of 1.5 percentage points up or down, that is, between 2.25% and 5.25%. The preview of the index was 0.72% in July, the highest value since 2004, and accumulated 8.59% in the last 12 months. The rise was driven by higher electricity prices amid the country’s worst water crisis in the last 90 years. The president of the national monetary authority, Roberto Campos neto, has already admitted that inflation will close the year above the maximum limit, projecting an advance of 5.8%. Market analysts also revised upward the expectation for the 2022 IPCA, from 3.75% to 3.80%. The inflation target for next year is 3.50%, with a variation between 2% and 5%.

The advance of inflation made the market revise the Selic, the BC’s main tool to contain price variation, to a 7% increase, the third week in a row. In the last edition, the expectation pointed to an advance of 6.75%. The Monetary Policy Committee (Copom) added 0.75 percentage point to the interest rate in June, raising the Selic rate to 4.25% a year. The collegiate said it should make another increase of the same magnitude in August, but “left the door open” for a higher increase. The upward trajectory of inflation has led analysts to project a 1 percentage point hike in the interest rate at the next meeting to prevent this year’s result from contaminating expectations for 2022.

The estimate with the Gross Domestic Product (GDP) was also revised upwards, up 5.29%, compared to 5.27% in the last edition. It was the 14th week in a row that the BC survey showed greater optimism with the recovery of the Brazilian economy in 2021. The median for the exchange rate also suffered a slight change, from R$ 5.05 to R$ 5.09. O dollar resumed its upward trajectory in early July with the resurgence of the domestic political environment and the spread of the Delta variant of Covid-19 in different parts of the world. Since the 1st, the North American currency was again traded above R$ 5. The exchange rate operates on a high this Monday, at R$ 5.22.