Economists raise projections for Brazil’s interest rates to more than 15%

by Marcela Ayres

BRASILIA (Reuters) – Economists have launched a new wave of upward revisions to Brazil’s interest rate projections this year, citing deteriorating inflation expectations, a weaker currency and concerns persistent on the fiscal outlook of the largest economy of Latin America.

Citi expected on Tuesday to peak rates at 15.50% in June, after similar moves by Itau, XP and Santander.

“Although we believe that most of the depreciation of the currency is related to fiscal (policy), we are still waiting for the Brazilian central bank to react to the worsening of the inflation outlook,” said the team of Citi in a report, with a decrease expected only next year.

On Monday, Itau raised its Selic forecast to 15.75% in the middle of the year, from 15%, projecting that it will remain at that level until 2025.

“If there is another round of currency depreciation and/or further deterioration of expectations, it is possible that the tightening cycle may be extended, eventually delaying rate cuts in 2026,” the bank warned .

Earlier this month, XP revised its Selic rate projection to 15.50% this year, emphasizing the growing challenges as inflation expectations move further away from the 3% target.

In December, Santander had done the same, although the Selic ends in 2025 at 15.50%.

These adjustments have gained momentum since the end of last year, after the administration of leftist President Luiz Inacio Lula da Silva presented a fiscal control package that disappointed markets, weakened the currency and pushed up futures of higher interest rates.

The deterioration persists despite the central bank’s decision in December to accelerate tightening with an increase of 100 basis points, signaling corresponding increases for the next two meetings, pushing rates from the current 12.25% to 14, 25%, the highest in more than eight years.

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

(Report by Marcela Ayres; Editing by Andrea Ricci)