Benefits PEC renews fiscal risk and launches extra challenge to BC until 2024, say analysts

The Central Bank takes the inflation target limit for this year for granted and has already increased the risks of this happening again next year. This worsening movement follows the process of deterioration of the external environment, which goes through the fear of recession, generalized rise in prices and still deals with the impacts of the pandemic.

In other words, it’s not easy for anyone. But, in Brazil, the environment has become even more challenging, in the opinion of experts, in the midst of the so-called PEC of Benefits in Congress. The cost of this project, which provides for a series of extra expenses with social aid, continues to rise, which poses an extra challenge to the BC, at least until 2024, warn analysts consulted by the CNN Brasil Business .

Last week, the expenditure was estimated at R$ 34 billion. A day later it rose to R$ 38.7 billion. This week, benefits for taxi drivers and app drivers were even included, leading the value to exceed R$ 40 billion. Estimates came to point to the total cost of close to BRL 58 billion — almost 70% of the entire 2022 Auxílio Brasil budget.

Despite the fact that the rapporteur of the proposal in the Chamber announced the day before that he decided to exclude the “Uber voucher” from the text, uncertainty about the limit of these expenses persists in the market, which, in response, has been realigning its expectations regarding the Bank’s capacity Central to control inflation in the short term.

unanchoring

Expectations for 2023 have indicated in recent months that inflation may once again exceed the ceiling. This climate among experts has increasingly advanced to 2024 as well.

In a survey by XP Investimentos with market players, the forecast for next year rose from 4.75% to 5.11%, and the following year, from 3.38% to 3.50%.

The movement is called in the market “an anchor of expectations”, since the center of the target is the “anchor” of fiscal policy. The center in 2023 will be 3.25%, with a ceiling of 4.75%. In 2024, the center was defined at 3%, with a ceiling of 4.5%.

The new projections of inflation in 2024 above the center of the target are linked to the recent escalation of fiscal risk in Brazil, experts told Ao CNN Brasil Business.

The goals of inflation are defined by the central bank as a “set of procedures” that seek to “guarantee price stability”. The idea is that the municipality uses its monetary policy to bring inflation to the desired numbers, but this is not always possible.

In 2021, for example, the center of the inflation target was 3.75%, with results 1.5 percentage points above or below also being tolerated. But the inflation accumulated in 12 months exceeded the maximum tolerated, ending the year in 10.06% .

The picture is no different for 2022. The Central Bank recognized on thursday (30) that the risk of inflation exceeding the target ceiling again is 100%. Currently, it is at 11.73%, with the target ceiling being 5.25%.

In addition to the autarchy, the market also seeks to project inflation in other years.

Inflation projections for 2023 are rising, because the municipality has not signaled that it will seek to bring inflation to the center of the target, according to Alexandre Schwartsman former director of the Central Bank and specialist CNN in economics.

“From the language, he seems satisfied with somewhere around 4%, not necessarily below that. If you have this reading, why would the market believe that it will stay in the center if not even the person in charge seems willing to do so?”, he asks.

In this sense, he considers that the Central Bank’s current signal is that the fight against inflation is being carried out, but that there would be no more way to anchor inflation for the next year.

At the Quarterly Inflation Report for example, the autarchy raised from 12% to 29% the chance of inflation being above the ceiling next year.

Renewed tax risk

Inflationary pressures include the chance of recession in the United States and other countries amid the global rise in fees mismatches between supply and demand that continue to raise the price of commodities and, as a novelty, the renewal of fiscal risk in Brazil.

The topic returned with more force to the radar of investors after the federal government presented a PEC that increases and creates new social benefits for the population.

For Schwartsman, the new projections of inflation in 2024 above the center of the target, of 3%, are mainly due to “the perception that the fiscal regime is under threat, even more so after the approval of the PEC on Fuels”.

The current generators of inflationary pressure, such as interest rate hikes around the world, risk of North American recession and commodities expensive, tend to influence prices in 2022 and 2023, but not in 2024, assesses the economist. Therefore, fiscal risk gains strength as “culprit”.

“The vote indicates that the tax regime, anchored in a constitutional rule, is flexible, and that it manages to circumvent the ceiling very easily”, says the expert.

The market’s interpretation is that the Brazilian tax regime must change, regardless of the outcome of the elections, which does not please investors and leads to an investment flight. As a result, the dollar rises, impacting inflation.

Chief economist at Órama Investimentos, Alexandre Espírito Santo, projects inflation of 5% in 2023, above the ceiling, and a number still within the target limit in 2024, but not in the center.

He points out that, in its most recent report, the Central Bank raised the risk of inflation being above the ceiling to 10%. For him, “it is plausible to admit that we will meet the target in 2024, even without being the center”.

The economist says that much of this change in expectations is associated with the fiscal issue.

Inflation is widespread, but the issue of expectations cannot be ignored, which is not good at the moment because it has an absolutely fragile fiscal side. People are left wondering what the new government will do about this, if anything. A new anchor will need to be flagged, even if it’s not the roof

Alexandre Espírito Santo, chief economist at Órama Investimentos

Espírito Santo’s assessment is that fiscal risk will remain a major factor for inflation forecast revisions, even if there are problems in other areas, such as abroad.

“The fragile fiscal aspect impacts expectations, and with the high inertia in Brazil’s inflation, it spills over into inflation now and in the future”, he emphasizes.

The economist considers that it is still possible for 2023 inflation to remain within the target, either due to weaker activity with higher interest rates or lower inflation in 2022 after government measures to reduce prices of fuels reducing inertia.

As a result, inflation for 2024 would tend to be revised downwards. However, this scenario depends on a game of forces between these positive and negative aspects, especially the degree of seriousness of the fiscal issue. “The sooner we resolve it, the smaller the impact”, he says.

How can the Central Bank react?

In its latest projection, the Central Bank diverged from the market. The current expectation of the municipality is that inflation will be below the center of the target in 2024, with 2.7%.

For the former director of the BC, the decisions of the autarchy are heavily influenced by market expectations.

The first point of influence comes from the inflation projection models used to determine interest rate hikes, as they include market expectations in the calculation.

In addition, investor expectations also generate movements. If the forecast is of fiscal risk, there is a withdrawal of investments it’s the dollar forcing the municipality to review its reference values.

In the projection of inflation below the center of the target in 2024, for example, the base value of the dollar considered was R$ 4.90. Currently, the price is R$ 5.30.

“The BC will have to put this in the account, raise the projection, and determine if the Selic would now bring inflation below 4% in 2023”, he says. He points out that interest rate decisions since May already take into account the 2023 targets, and that, in the second half, 2024 will also enter the account.

Espírito Santo, on the other hand, believes that the Central Bank will maintain its move to end the cycle of interest rate hikes soon, even with deteriorated expectations, opting for either a 0.5 percentage point hike in August or two 0.25 pp hikes.

“But he can never close the door, because events happen that can force him to make new highs, especially in the uncertain scenario. The probability that the bull cycle is ending is very high at this point,” he says.

In reports, both Goldman Sachs and UBS BB point out that, due to recent signs and current scenarios, the autarchy should not raise the Selic rate beyond 13.75%, but should keep it at high levels for a longer period of time. to fight inflation.

Goldman Sachs notes, however, that it does not rule out another rise above this value if “the dynamics of inflation proves to be more persistent than expected in the Copom base scenario and the conditional inflation forecasts for 2023 and 2024 advance even further”.

For the bank, the autarchy should start cutting interest only in the second or third quarter of 2023. For next year, the projection rose from an inflation of 5% to 5.4%, amid the worsening of the fiscal situation.

The report also highlights that “the Copom inflation projections do not incorporate the tax measures currently being debated in Congress”, which “implies a considerable reduction in inflation in the current year, but a smaller increase in inflation in the relevant horizon for the monetary policy”.

UBS points out that “with rates at higher levels until the end of 2024, it would be reasonable to expect even lower inflation than predicted by the Central Bank”. For 2024, the bank raised its forecast for the Selic rate from 7.5% to 7.75%.