Loosening of the Commitment to the Inflation Target and Risk of Recession in 2023
In making the projections that follow, we had to overcome several obstacles. The first was the “data blackout” caused by the strike of the Central Bank’s staff. The second was the explicit manifestation of populism by which the presidents of the Chamber of Deputies and Senate have colluded with President Bolsonaro to promote legislation that if approved will artificially reduce inflation this year while increasing it next year. This initiative will in no way resolve the inflation problem, so we have disregarded its possible impacts, limiting ourselves to projecting inflation without this “makeup”. The sum of the two restrictions has prompted us to make detailed the projections only for 2022, while only providing rough indications regarding economic growth and inflation in 2023.
In 2022, GDP should expand by 1.6%, but with pronounced deceleration in the second half of the year. This expansion is being driven by the growth of net exports and income transfers, while the deceleration will be caused by the placement (and maintenance) of monetary policy in restrictive territory. The high real interest rate will be maintained throughout 2023, which together with global turbulence will increase the likelihood of a recession.
Although monetary policy is in restrictive territory, which will eventually lead to lower inflation, the Central Bank has abandoned its commitment to the inflation target in 2023. Due to other objectives – mainly the President’s popularity in an election year – inflation at the end of 2022 will be lower than our projection of 9.2%, with the difference being due to the populist cosmetic measures to reduce inflation this year while increasing it in 2023. Disregarding these measures, our projection is for inflation of 5% in 2023. This is based on an average exchange rate of R$5.10/US$ and a stationary SELIC rate of 13.75% for the remainder of 2022 and all of 2023.
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