Economists Revise Brazil’s Interest Rate Projections

By Marcela Ayres

BRASILIA (Reuters) – Economists have recently increased their projections for Brazil’s interest rates for this year, attributing these changes to worsening inflation expectations, a declining currency, and ongoing concerns regarding the fiscal outlook of Latin America’s largest economy.

Citi forecasted on Tuesday that rates would peak at 15.50% in June, joining similar adjustments made by Itau, XP (NASDAQ:XP), and Santander (BME:SAN).

Citi’s team reported, “Although we believe the bulk of the currency depreciation is linked to fiscal policy, we still expect the Brazilian central bank to react to the worsening inflation outlook,” noting that any easing would only be anticipated next year.

On Monday, Itau raised its Selic forecast to 15.75% for mid-year, up from 15%, and projected that this rate would be maintained through 2025. They stated, “If there is another round of currency depreciation and/or further deterioration in expectations, it is possible that the tightening cycle could be extended, delaying rate cuts into 2026.”

Earlier this month, XP also revised its Selic rate projection to 15.50% for this year, highlighting the increasing challenges as inflation expectations drift further away from the 3% target. Similarly, in December, Santander made a forecast adjustment expecting the Selic to end 2025 at 15.50%.

These changes in projections have been gathering pace since late last year, following a fiscal control package introduced by leftist President Luiz Inacio Lula da Silva’s administration that disappointed markets. This led to a weakened currency and rising interest rate futures.

Despite this, the deterioration continued after the central bank’s decision in December to accelerate tightening with a 100 basis-point rate hike, indicating further increases for the next two meetings. This could raise rates from the current 12.25% to 14.25%, marking the highest level in over eight years.

Ultimately, inflation concluded 2024 at 4.83%, surpassing the upper limit of its 4.5% tolerance band. Economists, regularly surveyed by the central bank, have consistently raised their forecasts and are currently predicting consumer prices to rise by 5.08% this year and 4.10% next year.