In the Monetary Policy Report (IPOM) for December, the Central Bank further worsened the neutral figure to a range between -0.75% and -1.75%. There are poor projections for consumption, investment, the labor market, inflation and even raw material prices.
pessimism, In its December Monetary Policy Report (IPOM), the Central Bank (BC) laid out a pessimistic outlook for 2023 across a range of key indicators of the economy. Despite the fact that the trend points in the same direction as the previous report, the update sheds light on the shadows cast by the document activity.
- While the BC expects inflation to be higher off than in the previous report (12.3% versus 12%), for 2023 it points to an increase of 3.7% (compared to the September report’s 3.3%). “This review considers the surprises accumulated in recent months and a TCR [tipo de cambio real] that this projection will descend more slowly along the horizon”.
- For gross domestic product (GDP), the projection in 2023 has been adjusted downward from -0.5 to -1.5 in the previous report, now to a range of -0.75 to -1.75. This worsening of the previously announced recession is in line with estimates by private analysts, and is instead a far cry from the -0.5% the Treasury had calculated for the 2023 budget legislation.
- “We have an adjustment that has lasted for a significant part of 2022, with a decline in activity quarter on quarter, with domestic demand falling; We took a dip in the third quarter and we’re going to take a dip again in the fourth quarter. From there the economy is going to stabilize and it’s going to recover”, said Finance Minister Mario Marcel. For Marcel, the trajectory that the Treasury predicts converges with that of the Central Bank, and so he assured that the gap between annual are above average.
- For the Central Bank, “the projection continues to be considered that consumption and investment will show negative variation rates in 2023. This reflects a labor market that has lost strength, household and business expectations at pessimistic levels, a high real exchange rate and more restrictive financial conditions for all types of credit”. It was a paragraph that more succinctly described the pessimism expected for the coming year.
- “In raw material prices, a downward trajectory is still expected with respect to their current levels. For copper, average prices of US$3.55 and 3.45 are projected for the next two years, and for oil, values of around US$80 are expected over the same period.
optimism, In notes of optimism, for example, there is an upward revision of the growth projection for 2022. GDP is now expected to grow by 2.4% this year, better than the range between 1.75% and 2.25% reported in September.
- Similarly, “in the central scenario, it is projected that headline inflation will continue to decline in the coming quarters, and reach the target of 3% in the second half of 2024. Core inflation will decline somewhat more slowly,3 % end of 2024”. To help course this, the Central Bank initiated interest rate hikes that reached its pinnacle 11.25% in October. On Tuesday, December 6, the BC Council kept the monetary policy rate at that level. Most markets today believe it will retain the same target rate as in the January meeting, especially after the surprise CPI in November.
continuity and difference, In a press conference, BC President Rosanna Costa remarked that the December IPOM works within the same framework outlined from September. “It’s been a long time since we’ve had a rate broker” similar to the previous report, “which leads to the conclusion that we’re in a pretty similar scenario.”
- But amid the differences is a more worsening external scenario, reflected in persistent inflation, against which central banks of advanced economies should raise their rates. Apart from this, the fear of recession in America and Europe has been added.
- Although investment has staggered into 2022, Costa indicated that it is limited to specific sectors that will not be related to the cycle. There is a “clear adjustment” in consumption, he said, following the September report.
structural parameters, The Central Bank committed to updating two structural parameters: trend GDP and the neutral interest rate.
- Trend GDP: “In line with the June 2021 projection, it is projected that the trend growth of non-mining GDP will continue to decline during the period 2023-2032 […] For the period 2023-2032, the trend growth of non-mining GDP will average 2.2%”.
- Neutral rate: “The neutral MPR is estimated at 3.75%, with a range between 3.5 and 4% (+25bp compared to the previous estimate). This increase is in line with the recent reversal of neutral rates in other economies, which has seen global but reversed the downward trend shown by the rates.”