Stronger Real is not a “silver bullet” against inflation, economists say

Cited by the president of the Central Bank, Roberto Campos Neto, as a mitigating potential in the complicated inflation scenario, the strengthening of the real is not seen as a “silver bullet” by economists in the financial market.

Projections for the dollar have even fallen, but estimates for the Broad National Consumer Price Index (IPCA) continue in the opposite direction. Accounts carried out by some institutions show that not even replicating the current level of R$ 4.70 would put inflation close to the target, including in 2023, which is the main focus of monetary policy. Others explain that it is still too early to be confident that the dollar will continue at this level, especially in light of electoral uncertainties and high interest rates in the United States.

A week ago, after recognizing the surprise with the March IPCA (1.62%) and indicating that the BC would reassess the trend, opening the door to the continuation of the Selic rate hike beyond 12.75%, Campos Neto cited the exchange rate appreciation as a kind of mitigation for inflation ahead. The dollar went from R$5.57 at the end of 2021 to R$4.69 at the close of last Thursday, 14th. “Part of the exchange rate improvement is not reflected in inflation rates. We see some projections that take little account of the exchange rate appreciation,” he said, at an event by Traders Club and Arko Advice.

On Thursday, the 14th, for example, Santander Brasil reduced its forecast for the exchange rate at the end of this year, from R$5.40 to R$5.00, and at the end of next year, from R$5, 25 to R$4.80, but raised the forecast for the IPCA from 6.0% to 7.9% in 2022 and from 3.7% to 4.0% next year. The target for this year is 3.50%, with a margin of 2.0% to 5.00%, that is, it should be the second year of noncompliance by the BC with its main objective. For 2023, the central target is 3.25%, (1.75% to 4.75% band).

Even XP Investimentos, which sees balance at the current level of the dollar, raised the forecast for official inflation from 7.0% to 7.40% this year and kept the estimate for 2023 at 4.00%. rose from 12.75% to 13.75%.

In the assessment of economist Leonardo França Costa, from ASA Investments, even considering the current exchange rate, at R$ 4.70, and oil at US$ 100, as in the alternative scenario of the BC, the projections for the IPCA remain at 6.50 % this year and 4.00% in 2023. “Even with commodities (basic products, such as food and iron ore) helping, inflation is still above target”, he says, citing high levels as unfavorable vectors for inflation. of services and industrial goods, which should have an inertial effect on prices. “Tight monetary policy (high interest rates) will help with the inertia of services and industrial goods, but it will not be as fast.”

The official projection for the IPCA for France Costa is 7.20% for 2022 and 4.20% for 2023, considering a recent exchange rate revision from R$5.50 to 5.10. For the economist, the prospect of a troubled presidential election in Brazil and a greater increase in interest rates in developed countries should prevent the dollar from continuing at today’s level.

Economist João Fernandes, a partner at Quantitas Asset, already incorporates the exchange rate appreciation to R$ 4.70 in the projection for the 2022 IPCA, currently at 8.3%, slightly benefiting the 2023 IPCA, projected at 4.3 %. “Even after incorporating this recent appreciation of the real in the projections, we continue with a scenario above the target in both years. In the case of 2022, above the target ceiling”, stresses the economist, who projects the Selic at 13.50% at the end of the cycle.

The chief economist at Banco Original, Marco Caruso, argues that the exchange rate pass through to domestic inflation is faster and stronger when the Brazilian currency depreciates than when the real strengthens. “We should see food and fuel improving from now on, but I don’t see why change my IPCA for the year, which today is at 7.7%”, he considers, citing a 13.25% projection for the Selic.

Citing also the longer transfer in moments of strengthening of the real, the chief economist of Banco Fibra, Cristiano Oliveira, considers that, when it appears, the impact should be relevant, mainly on items related to commodities and industrial goods. Today, he projects 8.3% for the IPCA in 2022 and between 4.0% and 4.5% next year.

For economist Basiliki Litvac, from MCM Consultores, the high level of uncertainties still limits exchange rate revisions downwards, even with the current more favorable level. “The main uncertainties are related to the unfolding and persistence of the conflict in Ukraine, with reflections on commodity prices, more restrictive monetary policy in the US and turmoil arising from an eventual more troubled electoral scenario.”

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