GDP in the Third Quarter, Elevation of the Selic Rate and Outlook for the Economy in 2022

BRAZIL ECONOMICS - Report 06 Dec 2021 by Affonso Pastore, Cristina Pinotti and Paula Magalhães

Based on the indications provided by the IBC-Br, the contraction of GDP by 0.1% in the third quarter came as no surprise. However, because of the need to raise the interest rate, putting it in restrictive territory, and the recent evolution of various indicators (of confidence, industrial output and economic uncertainty), the perspective for 2022 is for a decline of GDP rather than expansion.

With expectations unanchored, the Central Bank will have to raise the SELIC rate above the level compatible with neutral, but to prevent GDP from shrinking even more in 2022, the increase of the interest rate will have to be relatively slow, with inflation also declining slowly.

At the end of the tightening cycle, the SELIC should reach 11.75%, but at the next COPOM meeting it will likely be increased by 150 instead of 200 basis points as we expected previously. At the end of 2022, inflation should be around 5%, reaching the target only in 2023.

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