The Central Bank’s Focus survey and the map of distribution of inflation expectations, both released Monday morning, provide the bank’s Monetary Policy Committee (Copom) breathing room to keep the forward guidance, which blocks interest rate hikes even in situations where there would normally be tightening, unchanged.
The median inflation projection for 2021 retreated during the week to 4.34% from 4.47%, closer to the 3.75% target for the year. The median projection for 2022 is still anchored at 3.5%, coinciding with the target.
Economic analysts said Monday morning that the drop in the 2021 inflation projection is due to electricity regulator Aneel’s decision to bring forward to this year the decision to change the tariff flag to red, which increases prices. The hike is used to inhibit consumption when the water levels of hydroelectric dams are low.
Although some of them suspect that it was a one-off decision, the fact that the inflation projection for 2021 has fallen should not be overlooked. It confirms that the recent acceleration of inflation is due to occasional issues and not to a more perennial force of price indexes.
The truth, however, is that economic analysts are giving perhaps too much weight to the 2021 inflation projection. Copom announced at its last meeting that it had moved its monetary policy horizon to mid-2022. What is relevant, therefore, is the average of expectations for 2021 and 2022 and the average of goals for 2021 and 2022.
The median of market inflation projections for 2022 is exactly on target, 3.5%. But the distribution of expectations for this year continues to hover below the target. The average of the inflation projections for 2022, by the most recent data, of December 4, is stalled at 3.4%.
The map of inflation expectations distribution for 2022 remains frozen for at least two months. In other words, all the noise over short-term inflation has not been able to change the inflation expectation for 2022, which continues with a bias below the inflation target for the year.
The map of expectations distribution, whose reference date is December 1, shows that around 60% expected inflation of 2022 around the target (between 3.32% and 3.78%). A representative group, of close to 40% of economic analysts, predicted inflation below the target (equal to or less than 3.32%).
Naturally, the freezing of inflation expectations for 2022 is somehow linked to the forecast that the Central Bank will raise interest rates sooner and with greater intensity.
Two months ago, just under 45% of economic analysts believed that interest rates could remain stable at the current 2% a year until the end of 2021. A month later, just under 35% of private-sector economists saw that as feasible. According to the most recent figure, they are now around 20%.
The group that believes in a moderate rise in interest rates in 2021 was more or less stable (representing about half of the analysts), but the group who anticipates a stronger rise (policy interest rate Selic over 3.5%, with bets of up to 5%), which reaches a quarter of the economic analysts, is bigger now.
Although expectations for inflation and the Selic are connected, this is not that important for the purpose of maintaining the forward guidance. The Central Bank has signaled that it will maintain the forward guidance until market inflation expectations and its own projections get closer to the targets for the relevant monetary policy horizon. It has nothing to do with expectations for Selic.
Among the Central Bank’s projections, it is worth noting that the conditional scenario that determines forward guidance is the one that uses the interest rate forecast by the Focus survey and the exchange rate calculated by the purchasing power parity method. The Central Bank has not highlighted the scenario with constant interest rates.
