In its latest quarterly monetary policy report, published on Thursday, Brazil’s central bank forecast inflation to be near its official target in the first quarter of 2028, but it still fell short.
Even so, policymakers revealed a forecast from early 2028 of 3.1%, just over the 3% target and including a 1.5 percentage point allowance for both above and below the target, so a 3% figure isn’t too bad.
This estimate underscores banks’ persistent struggle to anchor prices following a prolonged bout of aggressive monetary tightening.
The bank had previously anticipated annual inflation of 3.4% for the first quarter of 2027, the time frame it considers to be the most significant for monetary policy.
While this is one more incremental step closer to the goal, it still suggests that the bank doesn’t see inflation settling down at precisely its midpoint any time soon.
Interest rates remain at historic highs
The projection comes barely a week after the central bank decided to retain its benchmark Selic interest rate at 15%, a nearly two-decade high.
Policymakers termed the move as the start of a “new stage” of a long-term halt in attempts to reduce consumer costs.
Since September of last year, the bank has hiked borrowing costs by 450 basis points, kicking off one of the most dramatic tightening cycles in recent history.
Despite these steps, inflationary pressures remain stubborn, implying that higher rates may last longer than expected.
Adjustments to medium-term forecasts
The central bank cut 2025 inflation expectations by 0.1 percentage point to 4.8% from when it last issued its quarterly report in June.
The forecast for 2026 was kept unchanged at 3.6%, highlighting expectations of a slow road back to price stability.
The report pointed to inflationary pressures in both directions.
Among the variables that pushed inflation higher, the central bank highlighted the dynamism of the labor market in a growing context and the rise in electricity prices for homes.
Authorities highlighted the strengthening of the Brazilian real and a decline in inflation expectations as factors pressing downward at the same time.
Growth outlook: moderate
The monetary policy report also provided insight into the country’s economic forecasts.
The central bank revised its 2025 GDP growth prediction to 2.0%, down from 2.1% in June.
The revision reflects forecasts for an economic slowdown caused by the delayed effect of tighter monetary conditions.
For the first time, policymakers revealed their prediction for GDP growth in 2026, which is expected to be 1.5%.
The prediction indicates a steady slowing in activity as high borrowing rates weigh on investment and consumption.
Balancing price stability and growth
The new estimates highlight the tough position facing Brazil’s central bank in balancing the need to get prices under control with the need to foster economic activity.
Inflation expectations are returning to target, but the persistence of inflation highlights the constraints of raising interest rates given the current state of the cycle.
Meanwhile, the steep increase in interest rates is already starting to impact the economy, dampening medium-term growth prospects.
High inflation outlook is complicated by tight labour markets and rising electricity prices that will tend to offset the otherwise benign outlook provided by currency appreciation.
Policy path ahead
With inflation anticipated to remain above goal and growth predictions declining, the central bank faces a difficult policy path.
The decision to keep interest rates constant reflects a cautious stance, allowing officials to analyse the cumulative effects of previous tightening before considering any new measures.
For the time being, the message is one of patience: inflation may be approaching its objective, but the path ahead is still rough.
The central bank’s predictions through 2028 indicate that it is prepared for a prolonged period of tight policy to ensure long-term stability, even at the expense of slower development.
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