President Lula’s pressure on the Central Bank to cut interest rates seems to have achieved, so far, the opposite effect to that intended. Banks are revising their 2023 GDP projections downwards, and the reason is largely due to political noise.
The UBS BB team has just lowered its projection for this year’s GDP growth from 0.7% to zero. The market consensus is a growth of 0.8%. The reasons given for the revision are the “usual suspects,” says the bank: higher real interest rates, political noise and a slowdown in the international economy.
“The noise around monetary and fiscal policy should keep longer interest rates high. Therefore, we expect a 4% drop in investments in 2023,” states the report. “The noise is expected to remain high in the coming quarters. We revised the 2024 growth estimate from 1.8% to 1%. In 2025, we now expect 1.5% instead of 2.2%.”
Itaú also lowered its estimates for GDP, from 1.3% to 0.9%. In the bank’s evaluation, the “uncertainties regarding the commitment of the economic policy with low inflation” have brought “doubts regarding the monetary regime”, which was reflected in the increases in interest and inflation projections.
“To reverse the negative dynamics, it would be important for the government to reinforce its commitment to low inflation, keeping the target at 3% and reducing uncertainty regarding its stance regarding the autonomy of the Central Bank,” says Itaú.
Santander maintained its projection of 0.8% for the year, saying that the slowdown in domestic demand due to higher interest rates should be partially mitigated by the good results in agriculture, with the expectation of the best grain harvest in history. .
The Bank of America has not yet changed its estimate of an increase of 0.9%, but the bias is downward, among other reasons due to inflationary pressures and monetary tightening.
In a report sent to clients at the beginning of the week, consultancy AC Pastore, run by former BC president Affonso Celso Pastore, analyzes how the weakening of inflation expectations is, to a large extent, a consequence of the conflict between fiscal and monetary policies. – and this might have a significant impact on the debt rollover cost.
The consultancy concludes: “This is a ‘war’ that has only losers. Unfortunately, a political attack on Central Bank independence heightens the risk of inflation and reduces the capacity for economic growth.”
