Brazil’s central bank expressed confidence in its capacity for keeping inflation close to the official target until the end of 2027, as it published medium-term projections on Thursday in which the price growth continues to slow.
In its quarterly monetary policy report, the bank lowered inflation estimates for 2025 and 2026 and added a 3.2% expectation for the final quarter of 2027, putting the figure closer to the 3% target set by policymakers.
This view comes after an extended and heavy monetary tightening campaign that has taken the country’s key Selic interest rate to a 15% near-20-year high.
The current hiking cycle was initiated by the central bank in September, and in aggregate, rates have been hiking 450 basis points to balance the trade-off of controlling inflation with growing the economy.
Although inflation was predicted to be 3.6% in 2026 earlier this month, the newly announced 2027 projection of 3.2% shows that the trend will continue downward.
The bank’s target range for inflation is 1.5% to 4.5%, offering policymakers some breathing room in the face of global uncertainty and local structural concerns.
Tighter policy, stronger growth
Despite the high interest rate environment, Brazil’s economy has demonstrated resilience. The central bank raised its 2025 GDP growth prediction to 2.1%, from 1.9% in March.
The improvement reflects stronger-than-expected labor market performance in the first half of the second quarter, as well as a slight boost in consumer activity due to regulatory changes affecting payroll-deductible loans in the private sector.
These policy changes have bolstered household liquidity and boosted consumption, even though borrowing costs remain high.
Still, officials remain cautious, predicting a decline in growth in the second quarter and into the second half of the year.
The analysis identifies many factors that could dampen momentum, including tight monetary policy, limited spare in production capacity, declining global demand, and a waning boost from the agriculture sector, which contributed considerably to first-quarter growth.
Inflation forecasts revised downward
With its new 2027 marker, the central bank cut its inflation forecast for the preceding years. That cut 0.2 percentage points from the 2025 forecast to 4.9% and slightly lowered the 2026 outlook to 3.5%, a decrease of 0.1 point. The shifting trends imply inflationary pressures are gradually lifting, but it is an ambiguous picture at best.
The report indicates a mixed bag of forces impacting prices. The upside, however, is that better-than-expected economic activity continues to drive the services sector pressure.
The flipside is that the brl appreciation and the fall in the international prices of oil recently also helped to alleviate a little bit of those cost pressures, leaving more space to the central bank to breathe without the need for a further immediate tightening margin.
The bank also highlighted its ongoing hawkishness, calling the current level of interest rates “consistent with a very long pause.” It reflects a prudent strategy aimed at firmly reanchoring inflation expectations around the 3% target prior to any easing cycle by policymakers.
Path ahead: gradual disinflation under global uncertainty
The central bank’s most recent report paints a picture of cautious optimism. While inflation remains over goal in the short term, predictions indicate a gradual convergence over the next two years, even as global GDP is likely to decrease.
Domestic resilience, increased policy transmission, and favorable external variables, such as commodity price reduction, all contribute to the disinflationary path.
However, the road ahead is not without risks. Uncertainty over global interest rates, particularly in the United States and Europe, could spread to emerging countries, complicating Brazil’s monetary policy. Domestic economic pressures and political dynamics may also influence medium-term forecasts.
For the time being, the central bank appears to be holding firm, wagering that patience and policy persistence would return inflation to the desired corridor.
The next several quarters will put that confidence to the test, as Latin America’s largest economy struggles to strike a balance between growth and price stability.
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