This week’s Focus bulletin brought a complete combo of pessimism. There was a worsening of the inflation and exchange rate projection for 2024 and 2025, and an increase in that for next year. It is true that we cannot believe that the report, which brings together the median of market projections, is the oracle of truth, in which the actual results will be exactly the same as those projected. However, the document serves as a thermometer of the market’s mood, indicating trends.
If a year ago the trend was for the Selic to fall, inflation to be stable and the exchange rate to be around R$5.00; Today, the scenario for the future is very different. Inflation projected for 2024 is 4.64% – above the target ceiling (4.5%), and the exchange rate at the end of the period is R$5.60. In addition to this worsening, what caught the most attention was the increase in the Selic from 2025 to 12%. It wasn’t long ago that the market projected the basic interest rate at 8% for the end of 2025.
It goes without saying that the cause of worsening expectations in relation to all these variables is one: high public spending. The increase in public debt and the government’s insistence on focusing on measures to increase revenue, and not cut spending, to make fiscal adjustments has fueled the market’s mood, which places an increase in risk in the projections of macroeconomic variables.
The market only acts rationally when faced with the increased risk of public debt default in the future. To compensate for the uncertainty, investors ask for more premium to finance the government (higher interest rates) and rush to a strong currency, such as the dollar, putting pressure on its price.
For now, the worsening of the Focus bulletin’s projections and financial market variables (dollar and future interest rates) has not yet had an effect on the real economy. But if nothing is done, a crisis will be inevitable. From this perspective, it is crucial that the economic team soon launches the fiscal package with structural spending cuts. The government is racing against time and the crisis.
