Financial markets are once again worsening their GDP projections for this year.

Kelly Oliveira, Agência Brasil - The financial market's forecast for the decline of the Brazilian economy this year has been adjusted from 6,50% to 6,54%. The estimate for the contraction of the Gross Domestic Product (GDP) – the sum of all goods and services produced in the country – is in the Focus bulletin, a publication released weekly by the Central Bank (BC), with projections for the main economic indicators.

For next year, growth is expected to be 3,50%, the same forecast as five weeks ago. In 2022 and 2023, the financial market continues to project GDP growth of 2,50%.

Inflation

The financial institutions consulted by the Central Bank adjusted their projection for the Broad National Consumer Price Index (IPCA) from 1,61% to 1,63%.

For 2021, the inflation estimate remains at 3%. The forecast for the following years – 2022 and 2023 – also remained unchanged at 3,50%.

The projection for 2020 is below the inflation target that the Central Bank should pursue. The target, defined by the National Monetary Council, is 4% in 2020, with a tolerance range of 1,5 percentage points above or below. That is, the lower limit is 2,5% and the upper limit is 5,5%.

For 2021, the target is 3,75% and for 2022, 3,50%, also with a range of 1,5 percentage points in each year.

Selic

To achieve the inflation target, the Central Bank uses the basic interest rate, the Selic, currently set at 2,25% per year by the Monetary Policy Committee (Copom), as its main instrument.

For the financial market, the expectation is that the Selic rate will end 2020 at 2% per year. Last week, the forecast was 2,25% per year.

By the end of 2021, the expectation is that the base rate will reach 3% per year. By the end of 2022, the forecast is 5% per year, and by the end of 2023, 6% per year.

When Copom reduces the Selic rate, credit tends to become cheaper, encouraging production and consumption, reducing inflation control and stimulating economic activity. However, banks consider other factors when setting the interest rates charged to consumers, such as default risk, profit and administrative expenses.

When the Copom (Monetary Policy Committee) raises the basic interest rate, the goal is to curb heated demand, and this has repercussions on prices because higher interest rates make credit more expensive and encourage saving.

Dollar

The dollar is expected to remain at R$5,20 at the end of this year. By the end of 2021, the expectation is that the US currency will be at R$5.