Controlling inflation in Brazil will be the main challenge in the last year of the current term of President Jair Bolsonaro (PL), according to economists consulted by the UOL. Despite needs in other areas, such as job and income generation, they claim that the electoral dispute in 2022 will leave no room for structural reforms in the economy.
The general feeling is that, in the year that Bolsonaro will seek reelection, the government will not be able to advance administrative and tax reforms in Congress — two of the priorities on the list of Economy Minister Paulo Guedes. The space for a new labor reform, which has been denied by the government, is also restricted.
In this way, in the view of economists, it will be up to the government to control inflation in the final year of Bolsonaro — a task, by the way, that concerns the Central Bank, which has autonomy to decide the level of the Selic (the basic interest rate), than to the Ministry of Economy.
The inflationary issue is important, but it is the Central Bank’s agenda. Obviously, it could have a helping hand in the sense of public account, but that’s not going to happen. I do not know what the Ministry of Economy’s agenda for 2022 is in this context. Because, if you’re not going to renovate, what are you going to do? It will be idle for a year.
Alexandre Schwartsman, economist and partner at Schwartsman & Associados
Why is inflation a challenge?
Since the second half of 2020, the IPCA, the official price index, has been accelerating in Brazil. Behind the movement are factors such as the greater demand for food worldwide, the rise in international oil prices and the drought that affects electricity generation.
This has caused Brazilians to pay higher prices at the supermarket, at the gas station and at home, on the electricity bill.
Figures from the IBGE (Brazilian Institute of Geography and Statistics) show the latest trend in inflation:
IPCA accumulated in 12 months:
- December 2020: 4.52%
- January 2021: 4.56%
- February 2021: 5.2%
- March 2021: 6.1%
- April 2021: 6.76%
- May 2021: 8.06%
- June 2021: 8.35%
- July 2021: 8.99%
- August 2021: 9.68%
- September 2021: 10.25%
- October 2021: 10.67%
- November 2021: 10.74%
Inflation in Brazil is on the way to close 2021 above 10%, and the target pursued by the Central Bank is half of that, at 5.25%. For 2022, the financial market currently projects inflation close to 5%, but some economists claim that the result could be well above that value. BC’s target is a maximum of 5%.
Inflation control is the “possible challenge”
Economists heard by UOL they stated that there are several difficulties to be overcome in the economic field. But as 2022 is an election year, controlling inflation is the “possible challenge”.
Economist Mauro Schneider, from MCM Consultores, claims that the reforms advocated by Economy Minister Paulo Guedes will have little chance of moving forward in 2022.
I think none of that [reformas] it will advance in 2022. From a more real point of view, the great challenge is in the hands of the Central Bank in particular, in terms of recovering market confidence in coherent control of inflation. We are talking about a year in which only the BC will act.
Mauro Schneider, economist at MCM Consultores
Schneider claims that, by containing inflation, the BC will contribute to improving expectations about the Brazilian economy. Controlling high prices can make the economic environment more positive — something essential for the recovery of employment and productive investments.
Government helps if you don’t spend too much
“If the government manages to help in this credibility recovery process, this will be very positive”, adds Schneider. This government aid goes through public spending.
If in 2022 the government does not spend more than what is already planned in the Budget, experts say, this will already represent a contribution to the control of the IPCA.
For José Faria Júnior, a partner at Wagner Investimentos, an improvement in the business environment also depends on fighting inflation.
The government’s challenge is to improve the malaise with the economy. This is, by the way, the only chance for Bolsonaro to be re-elected. This involves trying to bring down inflation and alleviate unemployment through the payment of grants, such as Auxílio Brasil.
José Faria Júnior, partner Wagner Investimentos
BC has already signaled that it will act
In recent interviews, BC president Roberto Campos Neto signaled that the institution will raise interest rates as much as necessary to contain inflation.
Since March 2021, the BC has been raising the Selic (the basic interest rate) to keep prices from rising. After reaching 2% a year, the interest rate is now at 9.25%. In the financial market, there are already those who project the Selic rate at 14.25% per year in 2022.
With the newly won autonomy, the BC tends to continue the process in 2022, although raising interest rates is something unpopular for the Bolsonaro government in an election year.
It is very important to move forward in this process. [de alta de juros]. let’s pursue the goal [de inflação], and the process will extend until expectations are anchored. We understand that this is very important.
Roberto Campos Neto, president of BC
Low growth and high inflation
According to Ricardo Leite, head of the Variable Income area at Diagrama Investimentos, Brazil is currently under the threat of stagflation — a mixture of economic stagnation and high inflation.
“The challenge for 2022 is really to bring inflation back to the target. Although I don’t believe the IPCA will be below 6% next year,” said Leite. BC’s target is an IPCA of up to 5%.
The economist also has doubts about the BC’s ability to control prices only by raising interest rates.
We are talking about inflation caused by the supply chain, not consumption. At the same time, economic growth has fallen short of expectations. The Central Bank will have to balance the rise in interest rates so as not to kill growth.
Ricardo Leite, from Diagrama Investimentos