Brazil inflation forecast to slow due to weaker growth

After ending 2022 above the target set by the central bank for the second consecutive year, Brazil's inflation is expected to slow this year, but due to negative reasons.

"After two years above targets, in 2023 the trajectory of inflation will tend to decline and will close the year within the tolerance margin of error set by the central bank. The deceleration will be due to weaker economic activity than last year," Roberto Troster, former chief economist at Brazilian banking federation Febraban and now an economist at consultancy Troster & Associados, told BNamericas. 

The official inflation index, the IPCA, ended 2022 at 5.79%, according to statistics bureau IBGE. It was above the central bank’s target of 3.5%, plus or minus 1.5%.

In 2021, inflation was 10.06%, well above the central bank’s target of 3.75%, also plus or minus 1.5%.

 

Source: IBGE

For 2023, the central bank target is 3%, plus or minus 1.50%.

The central bank uses the inflation targeting model to guide its interest rate policy.

Whenever the benchmark rate is above the target band for the year, the central bank head is obliged to write an open letter explaining why the monetary authority has failed in its mission.

BASE RATE 

The central bank in recent quarters raised its benchmark interest rate aggressively to contain inflation. The rate, known as the Selic, rose from 2% at the beginning of 2021 to the current 13.75%.

Despite the economic slowdown, most economists do not expect a cut in interest rates before the middle of the year because inflationary pressure still exists and the fiscal policy of the new government of Luiz Inácio Lula da Silva remains unclear.

"Inflation may prove inertial/sticky given intensifying backward looking price and wage setting mechanisms (with resetting wage contracts incorporating cost-of-living adjustments). In our assessment, the challenging current conditions warrant a conservative calibration of monetary policy for a reasonable period of time," wrote Alberto Ramos, an economist at Goldman Sachs, in a research report.