Brazil’s inflation, GDP growth expected higher in 2024, interest rates could rise in 2026

SAO PAULO (ICIS)–Brazil’s analysts and economists are increasingly thinking inflation will continue to rise in 2024 but remain upbeat about GDP growth this year, the Banco Central do Brasil (BCB) said in its weekly Focus Survey.

• Rates to stay higher for longer on inflation uptick
• Currency to remain weak to year end
• GDP growth robust this year, mixed opinions on 2025

The survey, on the prospects for the largest Latin American economy, revised upward projections for inflation, GDP growth, and the exchange rate of the real in 2024.

Meanwhile, the recent uptick in inflation may not be enough for the central bank to raise interest rates, but the consensus among analysts is now that the main interest rate benchmark, the Selic, could rise in 2026.

INFLATION
According to the survey, economists now expect the 2024 IPCA consumer price index to end the year at 4.25%, up from the 4.22% projection in the previous week and the sixth consecutive weekly increase.

The 2025 inflation outlook edged up to 3.93% from 3.91%, while projections for 2026 and 2027 remained steady at 3.60% and 3.50%, respectively.

The latest inflation figures for July showed prices had risen for a fourth consecutive month, with the annual rate of inflation at 4.50%, well above the April low of 3.69%.

However, official data this week for the so-called IPCA-15 – which measures the month’s first fortnight’s price rises – showed a small decrease from 4.50% to 4.35%.

Analysts at Capital Economics, who have been suggesting the central bank could hike the Selic as soon as this year to contain the latest rise in inflation, said the IPCA-15 data published this week was likely to make the central bank pause for now when it meets again to set monetary policy in September.

“The breakdown of the data showed that the fall in inflation was pretty broad based. Housing and health inflation fell particularly sharply to 3.6% year on year [in the first fortnight of August] and 5.8% year on year, respectively, although this was partly offset by a rise in transport inflation,” said Capital Economics.

“Developments in underlying inflation were a bit more concerning. Our estimate of underlying core services inflation – which strips out volatile items – edged up in the first half of August.”

SELIC
The monetary easing cycle that started a year ago as inflation was coming down is now considered well and truly over. Most analysts expect the central bank to keep interest rates on hold for the rest of this year and potentially in 2025, with only a few forecasting a rise.

Earlier in August, the bank left the Selic unchanged at 10.50%. During the inflation crisis, the Selic peaked in 2023 at 13.75%.

This week, the Focus Survey showed Brazilian economists and analysts agree that the Selic will not be lowered this year – for the 10th consecutive week, despite the latest tribulations in the exchange rate and investors’ doubts about the government’s commitment to fiscal discipline.

However, the average in this week’s survey showed they are still forecasting a half a percentage point fall for 2025 to 10.0%, also unchanged from the previous survey.

The novelty this week was that, from an earlier projection for the Selic at 9.0% in 2026, economists have now upgraded that and expect interest rates to end that year at 9.5%, the first change in the forecast in 14 weeks.

The 2027 rate expectation remained at 9.0%.

“Many Copom [monetary policy committee at the BCB] members have sounded very hawkish in recent media comments, opening the door to a rate hike,” said Capital Economics this week after the IPCA-15 data was published.

“The next meeting in September will be a close call, but we think that, on balance, the fall in inflation in the first half of August, alongside the Fed’s seeming confirmation that it will kick off its easing cycle in September, mean that it’s a bit more likely that Copom will leave rates unchanged at 10.50%.”

GDP
One bright spot in this week’s central bank survey was that Brazil’s economy is expected to continue on a strong recovery path, with analysts now forecasting GDP growth of 2.43% in 2024, up from 2.23% in earlier surveys.

However, the forecast for 2025 was for a minor dip to 1.86% from 1.89%. Unlike Brazilian economists, the IMF said it expected Brazil’s economy to grow 2.4% in 2025 in July, in part as a result of the reconstruction efforts at Rio Grande do Sul.

Brazil’s southernmost state, a key industrial and agriculture producer in the country, was hit by the severe floods in May and its economy came to a standstill for nearly a month.

According to this week’s survey, GDP growth estimates for 2026 and 2027 remain steady at 2.0%.

REAL EXCHANGE RATE
The median projection for the exchange rate for the real to the US dollar in 2024 increased slightly to reais (R) 5.32, from R5.31.

The real has sharply depreciated this year versus the dollar on the back of higher inflation and investors’ fears that the cabinet presided over by Luiz Inacio Lula da Silva wants to expand public services at the expense of a larger fiscal deficit.

Lula’s direct attacks on the governor of the central bank have not helped either.

As such, most economists no longer expect the exchange rate to hover around R5 to the dollar as it did at the beginning of the year. For 2024, they are now forecasting a dollar to be worth R5.32, while in 2025 it would be at R5.30 and in 2026 at R5.25.

Focus article by Jonathan Lopez