Brazil Analysts Raise Interest Rate, Inflation Forecasts Amid Weaker Currency

Brazilian economists expect the benchmark interest rate to reach 12.25% in December 2026, up from 12%, and annual inflation to hit 4.10% in 2026, near the 4.5% ceiling. The central bank has pledged two more full percentage point rate hikes, and analysts now see consumer price increases at 5.08% this December, up from 5%. A weaker real adds pressure on costs of imported goods, and the disinflation process has stalled.

Brazilian economists anticipate the benchmark interest rate to reach 12.25% by the end of 2026, up from the current 12%, as the Central Bank grapples with escalating inflation and global economic uncertainties [1]. This projection reflects a more aggressive monetary policy stance, with two additional full percentage point rate hikes expected in the coming months.

The recent surge in the dollar and concerns over inflation and the global economy have prompted the Central Bank to accelerate its interest rate hikes. In December 2022, the Monetary Policy Committee (Copom) raised the Selic rate, the economy's benchmark interest rate, by 1 percentage point to 12.25% per year, surprising the financial market with a larger-than-expected increase [1]. The committee attributed the higher-than-expected hike to external uncertainties and disruptions caused by the government's fiscal package.

The Selic rate is the Central Bank's primary tool for controlling official inflation, as measured by the Broad National Consumer Price Index (IPCA). In November 2022, the IPCA fell to 0.39%, driven by a green flag on electricity bills and a decline in fuel prices [1]. However, food prices, particularly meat, and airline tickets continued to rise, leading to a 12-month increase of 4.87% and surpassing this year's target ceiling [1].

For 2024, the National Monetary Council (CMN) has set an inflation target of 3%, with a tolerance margin of 1.5 percentage points [1]. As a result, the IPCA should not exceed 4.5% or fall below 1.5% this year.

The disinflation process has stalled, with inflation continuing to pose a significant challenge for the Brazilian economy. A weaker real adds pressure on costs of imported goods, further fueling inflationary pressures [1]. The Central Bank's latest inflation projections indicate a more adverse inflationary outlook [1].

References:
[1] Agência Brasil. (2022, December 14). Brazil's Central Bank increases basic interest rate to 12.25% per year. Retrieved December 15, 2022, from https://agenciabrasil.ebc.com.br/en/economia/noticia/2022-12-14/brazils-central-bank-increases-basic-interest-rate-to-1225-per-year