The market has once again lowered its GDP forecast for 2020: a recession of 2,96%.
The information is contained in the Focus bulletin, which projects key economic indicators and was released by the Central Bank. The bulletin also recorded a cut in the basic interest rate (Selic) for 2020 to 3%, compared to 3,25% the previous week.
By Luciano Nascimento - Reporter for Agência Brasil - Brasília
The financial market has reduced its projection for Gross Domestic Product (GDP, the sum of goods and services produced in the country) this year to -2,96%, compared to -1,96% indicated last week. This information is contained in the Focus bulletin, with projections for the main economic indicators, released today (20) by the Central Bank. The bulletin also recorded a cut in the basic interest rate (Selic) for 2020 to 3%, compared to 3,25% the previous week.
Market forecasts for GDP growth in 2021 indicate a 3,10% increase. For 2022 and 2023, the forecast remains at 2,50% growth.
The dollar exchange rate is expected to close the year at R$ 4,80, compared to R$ 4,60 predicted last week. For 2021, the expectation is that the American currency will be at R$ 4,50, compared to R$ 4,47 last week. For 2022, the forecast is that the exchange rate will be R$ 4,40 and, in 2023, R$ 4,50.
Inflation
The financial institutions consulted by the Central Bank also reduced their inflation forecast for 2020. The projection for the Broad National Consumer Price Index (IPCA) fell from 2,52% to 2,23%.
For 2021, the inflation estimate was also reduced from 3,50% to 3,40%. The forecast for subsequent years remained unchanged at 3,50%.
The projection for 2020 is below the center of the inflation target that should be pursued by the Central Bank. The target, defined by the National Monetary Council, is 4% in 2020, with a tolerance range of 1,5 percentage points above or below. 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 3,75% per year by the Monetary Policy Committee (Copom), as its main instrument.
For the financial market, the expectation is that the Selic rate will be reduced again and end 2020 at 3% per year. Last week, the forecast for the end of 2020 was 3,25% per year.
When the Copom (Monetary Policy Committee) reduces the Selic rate (Brazil's benchmark interest rate), the tendency is for credit to become cheaper, incentivizing production and consumption, thus reducing inflation and stimulating economic activity. When the Copom increases the benchmark interest rate, the objective is to contain heated demand, and this has repercussions on prices because higher interest rates make credit more expensive and encourage saving.
By the end of 2021, the expectation is that the base rate will reach 4,5% per year. The previous forecast was 4,75% per year. For the end of 2022 and 2023, institutions maintained their forecast at 6% per year.
In the first edition of this year's Focus Bulletin, economists predicted GDP growth of 2,30%. Due to the economic impacts of the new coronavirus (COVID-19) pandemic, this is the tenth consecutive week in which the forecast for Brazilian economic activity has been reduced. For next year, leading financial market analysts estimate that the economy will grow by 3,10%.