Political-fiscal uncertainties and water crisis lead XP to see greater monetary tightening and weaker real By Reuters

© Reuters. High voltage electricity towers seen during sunset in Brasilia. 29/08/2018 REUTERS/Ueslei Marcelino

By Camila Moreira

SAO PAULO (Reuters) – Uncertainties related to the increase in political-fiscal risk, coupled with the water crisis and the spread of water, led XP to project greater monetary tightening and additional pressure on the .

“The first and most important point is the fiscal uncertainty and the political temperature, with a Congressional Budget that does not stand still and will need to be adjusted. On the eve of an election year and with the political environment as we are living, it is always a risk for the fiscal framework”, highlighted the chief economist of XP, Caio Megale, in an interview with journalists.

Given this scenario, XP’s projection for the exchange rate went from 4.9 reais to 5.2 reais per dollar at the end of this year, with the calculation for the end of 2022 going from 4.9 reais to 5.1 reais per dollar.

“Our assessment is that the exchange rate is still very devalued. At this level, it ends up generating more inflation than helping with the external accounts,” said Megale.

Considering that the pressure on inflation is more persistent and widespread, XP even increased the projection for the basic interest rate from 7.25% to 8.5% at the end of the monetary tightening cycle, in 2022.

Basic interest rates are currently at 5.25%, and the Central Bank will meet again on September 21 and 22 to discuss monetary policy. XP’s expectation has now gone to two more highs of 1.0 percentage point, followed by another of 0.75 point in December, taking the Selic to 8% at the end of this year. The final increase of the cycle, of 0.5 point, would occur in the beginning of 2022.

The higher Selic rate offsets the effects of inflationary inertia and the weaker exchange rate. Thus, XP maintained its forecast of a 3.7% increase for the 2022 IPCA, after a rate of 8.4% this year.


One of the factors that may help in the sharp deceleration in prices expected for 2022 is electricity, after the increases in tariff flags this year.

“Electric energy has a disinflationary character for next year after the flag this year. We will go from a 20% increase in energy in 2021 to a drop of 6% in 2022, simply due to the tariff flag effect”, explained the economist at XP Tatiana Nogueira.

But both results for the IPCA are well above the center of the government’s inflation target, leaving complete convergence to the 2023 target, according to XP.

Regarding economic activity, the perspective is that it will continue to recover in the short term, with a (GDP) growth of 5.3% in 2021. But the perspectives for 2022 continue to deteriorate, as high interest rates affect financing conditions and investment and consumption levels.

For next year, the prospect of expansion was reduced from 1.7% to 1.3%. This scenario, however, could still get worse, as it does not account for possible energy rationing.

“For next year there is an increase in uncertainties, and we estimate variations (quarterly of GDP) very close to zero. It is not possible to rule out a scenario of technical recession”, according to economist Rodolfo Margato.

“In the event of rationing, with a mandatory 10% reduction in electricity consumption, this removes 1.2 point (percentage) from GDP throughout the year, which would bring the GDP to practically zero”, he added, noting, however , which XP considers this scenario unlikely, given that the probability of rationing is considered low, between 20% and 30%.