World events cause significant falls in raw materials prices, but it is too early to predict the extent of this movement, external to the Central Bank of Brazil.

In the external scenario of that country, the environment became less favorable.

Some central banks in major economies have clearly expressed the need to be cautious in the face of further persistence of inflation, which makes financial conditions more challenging for emerging economies.

In addition, the real estate issue in China, the possibility of a new Covid-19 wave during the winter and the appearance of the omicron variant add uncertainty about the pace of recovery in central economies.

Regarding the Brazilian economic activity, the publication of the GDP for the third quarter revealed a slightly lower evolution than expected, despite the fact that the activities most affected by the pandemic continued on a path of robust recovery.

From the perspective of the Central Bank of Brazil, the most frequent indicators point to a drop in economic activity, distributed in various sectors in September and possibly in October.

In the same sense, the confidence indices already available for the first months of the current quarter show a deterioration. Consequently, the bank’s Monetary Policy Committee lowered its expectations for activity in the short term.

Raw Materials

By 2022, if, on the one hand, the increase in risk premiums and the more intense tightening of financial conditions act to discourage economic activity, on the other, the Monetary Policy Committee assesses that growth tends to benefit from the performance of agriculture and of the rest of the process of normalization of the economy, particularly in the service sector and in the labor market, as the health crisis subsides.

Consumer inflation remains high, with an increase distributed in various components, and has been more persistent than expected.

The Monetary Policy Committee’s baseline scenario for inflation involves risk factors in both directions.

On the one hand, a possible reversal, albeit partial, of the increase in international prices of raw materials in local currency would produce an inflation trajectory below the baseline scenario.

On the other hand, greater extensions of fiscal policies in response to the pandemic that put pressure on aggregate demand and worsen the fiscal trajectory could raise the country’s risk premiums.