Financial market forecasts 5.89% decline in economy this year

The financial market’s estimate for the reduction in the Brazilian economy this year stood at 5.89 percent. This is the tenth consecutive revision for the decline in the country’s gross domestic product. Last week, the projected contraction had stood at 5.12 percent.

The estimate can be found in the Focus readout, published weekly by the Central Bank with the projections for the main economic indicators.

The forecast for the growth of the GDP in 2020 went from 3.20 to 3.5 percent and was kept at 2.5 percent for 2022 and 2023.

Dollar

The exchange rate of the US dollar is likely to close out the year at R$ 5.40. Last week, the forecast had stood at R$ 5.28. For 2021, the currency should cost R$ 5.03, compared to last week’s R$ 5.

Inflation

The financial institutions surveyed by the Central Bank continue to cut the inflation forecast for 2020. The projection for the National Broad Consumer Price Index (IPCA) sank for the tenth consecutive time, from 1.59 to 1.57 percent.

For 2021, the estimated inflation was also reduced, from 3.2 to 3.14 percent. The forecasts for the following years—2022 and 2023—was kept unchanged at 3.5 percent.

The estimate for 2020 is below the inflation target that should be pursued by the Central Bank. The target, set by the National Monetary Council, is four percent in 2020, with a tolerance margin of 1.5 percentage points plus or minus. In other words, the bottom limit is 2.5 percent, the upper limit 5.5 percent.

For 2021, the target is 3.75 percent, and, for 2022, 3.5 percent—also with a 1.5 percentage point interval for each year.

Selic

In order to reach the inflation target, the Central Bank uses as its main tool the benchmark interest rate—Selic—currently set at three percent a year by the Monetary Policy Committee (Copom).

When Copom cuts the Selic rate, credit tends to be cheaper, with a stimulus in both production and consumption, weakening its control over inflation and stimulating economic activity. When Copom raises the benchmark interest rate, the goal is to curb a warmed-up demand, which reverberates on prices as higher interest makes credit more expensive and stimulate saving.

For the end of 2021, the interest rate is expected to reach 3.29 percent a year. Last week’s estimate had stood at 3.5 percent. For the end of 2022, the institutions cut the yearly forecast from 5.25 to 5.13 percent, and, for the end of 2023, the estimate was kept at six percent.