World Stock Watch

Brazil’s Interest Rate Projections Soar Amid Inflation Concerns

Economists Sound the Alarm

A fresh wave of upward revisions to Brazil’s interest rate projections has economists buzzing. The culprit? Deteriorating inflation expectations, a weaker currency, and lingering concerns over the fiscal outlook of Latin America’s largest economy.

Citi Leads the Charge

Citi has forecasted interest rates to peak at 15.50% in June, a move echoed by Itau, XP, and Santander. According to Citi’s team, “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 of the inflation outlook.” Easing is only expected next year.

Itau and XP Weigh In

Itau has raised its Selic forecast to 15.75% by mid-year, up from 15%, projecting it to remain at that level through 2025. XP, meanwhile, has revised its Selic rate projection to 15.50% this year, citing growing challenges as inflation expectations drift further from the 3% target.

Santander Joins the Chorus

In December, Santander also forecasted the Selic to end 2025 at 15.50%. These adjustments have been gaining momentum since late last year, after leftist President Luiz Inacio Lula da Silva’s administration unveiled a fiscal control package that disappointed markets, weakening the currency and pushing interest rate futures higher.

Central Bank’s Tough Decision

The deterioration persisted despite the central bank’s December decision to accelerate tightening with a 100 basis-point rate hike, signaling matching increases for the next two meetings. This would push rates from the current 12.25% to 14.25%, the highest in over eight years.

Inflation on the Rise

Inflation closed 2024 at 4.83%, above the upper limit of its 4.5% tolerance band. Economists surveyed weekly by the central bank have been steadily raising their forecasts, now expecting consumer prices to rise by 5.08% this year and 4.10% the next.

A Gloomy Outlook

As Brazil’s economy continues to struggle, one thing is clear: interest rates are on the rise, and inflation concerns are here to stay. With economists predicting a prolonged tightening cycle, it’s uncertain when rate cuts will come. One thing is certain, however: Brazil’s economy is in for a bumpy ride.