Central Bank predicts high inflation in December

Despite the cooldown forecast for food prices, December’s inflation should remain elevated, chiefly pulled up by expenditures with monthly school fees and the increase in electricity bills, the Central Bank’s Monetary Policy Committee (Copom) reported.

In the minutes of last week’s meeting, made public today (Dec. 15), Copom reveals that, despite the stronger inflationary pressure in the short run, it has retained the diagnosis according to which current blows are temporary. The committee, however, pledged to keep a watchful eye on the evolution of the inflation.

According to Copom, the country’s official inflation, as gauged by the National Broad Consumer Price Index (IPCA), in 2020 is 4.3 percent, above the four percent target. The projection is anchored on the benchmark interest rate (Selic) at two percent a year and an exchange rate with the dollar at R$5.25. As for 2021, the projection is 3.5 percent, and four percent for 2022.

In the international landscape, the committee believes “the resurgence of the pandemic in some of the main economies has reversed mobility gains and should affect economic activities in the short term.” Copom also argues that the promising results from COVID-19 vaccine tests tend to improve the confidence in the normalization of activities in the medium run.

Regarding economic activity in Brazil, the document notes that recent indicators suggest the continuity of uneven recovery across sectors, as expected, adding that a stagnant scenario for the economy may produce an inflation trajectory below the expected, especially when this stagnancy is focused on services.

“This risk intensifies when a slower reversal of the effects of the pandemic prolongs the environment of high uncertainties and the increase in precautionary savings,” the text reads.

In another scenario, Copom believes that prolonging fiscal policies implemented as response to the pandemic which worsens the country’s fiscal trajectory—or frustrations regarding the continuity of overhauls—may increase the inflation above projections.

“Prospectively, the low predictability linked to how the pandemic will develop and to the necessary adjustment in public expenditures starting in 2021 increases the uncertainty on the continuity of the resumption of economic activity. The committee considered that the risks associated to the evolution of the pandemic may lead to a domestic scenario characterized by an even more gradual resumption,” the minutes say.

Copom says that perseverance in implementing the necessary reforms is key to bringing about sustainable economic recovery. Questioning the continuity of reforms and permanent changes in adjusting public accounts may raise the economy’s structural interest rate, it went on to say.