By Marcela Ayres
BRASILIA (Reuters) – Economists have launched a new wave of upward revisions to projections for Brazilian interest rates this year, citing worsening inflation expectations, a weaker currency and continued concerns about the budget prospects of Latin America’s largest economy.
Citi forecast on Tuesday that rates will peak at 15.50% in June, following similar moves by Itau, XP and Santander.
“While we believe most of the currency devaluation is related to fiscal policy, we still expect Brazil’s central bank to respond to the deterioration in the inflation outlook,” Citi’s team said in a report, with easing not expected until next year expected.
On Monday, Itau raised its mid-year Selic forecast from 15% to 15.75%, and expects it to remain at that level until 2025.
“If there is another round of currency depreciation and/or a further deterioration in expectations, it is possible that the tightening cycle will be extended, ultimately delaying interest rate cuts in 2026,” the bank warned.
Earlier this month, XP revised its Selic interest rate projection to 15.50% this year, highlighting growing challenges as inflation expectations drift further from the 3% target.
In December, Santander had done the same and also predicted that the Selic would end at 15.50% in 2025.
These adjustments have accelerated since late last year, after the government of left-wing President Luiz Inacio Lula da Silva unveiled a fiscal control package that disappointed markets, weakened the currency and pushed up interest rate futures.
The deterioration continued despite the central bank’s decision in December to accelerate tightening with a 100 basis point rate hike, which would signal similar increases for the next two meetings, raising rates from the current 12.25 % to 14.25%, the highest level in more than eight years.
Inflation closed 2024 at 4.83%, above the upper limit of the tolerance margin of 4.5%. Economists polled weekly by the central bank have steadily raised their expectations and now expect consumer prices to rise 5.08% this year and 4.10% the year after.
(Reporting by Marcela Ayres; Editing by Andrea Ricci)