Economists’ predictions for the Selic rate at the end of the current monetary tightening range from 14.25% to 16.25%; the median forecast points to 15% in Q1
03/17/2025
With the Central Bank’s Monetary Policy Committee (COPOM) widely expected to raise the benchmark Selic rate by 100 basis points, the market’s focus is now on any signals the committee might provide regarding the next steps in monetary policy. The prevailing view is that the tightening will continue into the second quarter. However, the use of forward guidance has sparked debate among market participants, as some expect clearer communication on the interest rate trajectory starting in May.
The argument against tying the COPOM’s hands comes from the broader economic landscape. Since January, economic activity data has been weaker than expected, while inflation remains persistently above target with an unfavorable composition, given rising service prices and core inflation pressures. Additionally, the international environment has become significantly more unstable, increasing asset price volatility and uncertainty among economic agents.
“There’s no point in providing signals,” said Santander economist, Marco Antonio Caruso. “We believe the COPOM should not make any strong statements about its next moves. Decisions should be based on inflation convergence, without giving hints about the direction.”
In December, when the COPOM announced a “shock” rate hike to stabilize markets and curb the depreciation of domestic assets, it signaled two consecutive increases of 100 basis points in January and March. This has heightened market expectations, as economic forecasts vary significantly regarding future steps.
Market projections
Among 125 financial institutions and consultancies surveyed by Valor, all anticipate a 100-basis-point hike in the Selic rate on Wednesday (19), bringing it to 14.25%. However, when asked about the expected level at the end of the tightening cycle, projections range from 14.25% to 16.25%. This disparity was anticipated by the Central Bank itself. At an event in Rio de Janeiro in February, Central Bank Chair Gabriel Galípolo noted that as the forward guidance period neared its end, “the boat would rock a little more.”
“We are in a period where the Central Bank is data-dependent. There is a need to assess whether the economic slowdown is temporary or if we are entering a more sustained deceleration. Given the current magnitude of interest rates, some slowdown was expected. We are seeing it happen, but it remains a minor factor amid ongoing uncertainties and risks,” said Ariane Benedito, chief economist at PicPay, whose forecast points to a Selic rate of 15% in May.
Given this more unstable backdrop, Ms. Benedito sees potential benefits in the Central Bank providing forward guidance for the next meeting. “Ideally, that would be the best approach in our view. However, we believe it is highly unlikely that the Central Bank will take this route given the current conditions. External uncertainty is too high and will weigh on the risk assessment, which is why we expect future steps to remain data-dependent and conditional on evolving circumstances.”
In its January decision, the COPOM maintained an inflation risk assessment with an upward bias, but there is now market uncertainty about whether this stance will be reiterated in the upcoming statement. Key concerns among market participants include rising external uncertainty—driven by the trade war initiated by U.S. President Donald Trump—and weaker-than-expected economic activity data since the last meeting in January.
Alexandre Bassoli, chief economist at Apex Capital, expects a softer communication from the COPOM. “Based on public statements from policymakers, my impression is that they now see a more balanced risk assessment,” he said. In his view, recent signs of economic cooling should be emphasized by the committee. However, he believes the slowdown will be “gradual” and points out that “there are no signs of an economic collapse,” even as domestic inflation remains a challenge.
“The trajectory of inflation expectations has been a major challenge,” Mr. Bassoli noted. In Valor’s survey, the median forecast for the IPCA official inflation rate this year increased from 5.4% in January to 5.6%, while the median inflation estimate for 2026 rose from 4.2% to 4.4%, approaching the upper limit of the target range. “What seems most likely to me is that, over time, there will be disappointment with the inflation trajectory,” he added.
Meanwhile, Marcela Rocha, chief economist at Principal Asset Management in Brazil, expects the COPOM to maintain a hawkish stance, given persistent inflationary pressures and a gradual loss of economic momentum, which she considers a natural outcome of the monetary tightening already in place. “The COPOM will not change its risk assessment and will keep the upward bias for inflation. Despite weaker economic activity data and a stronger exchange rate, the Central Bank’s projections and the broader economic outlook still suggest upside risks.”
Inflation de-anchoring
Taking into account recent shifts in exchange rates, oil prices, and inflation expectations from the Central Bank’s Focus survey, Ms. Rocha estimates that the COPOM’s inflation projection for its relevant horizon (Q3 2026) should decline from 4% to 3.7%. Given this outlook, she believes the COPOM “cannot be complacent” with the extent of inflation de-anchoring suggested by both market expectations and its own forecasts. This, she argues, could lead the Central Bank to signal the continuation of monetary tightening in upcoming meetings.
“If communication is too open, with too much flexibility, it could have a counterproductive effect for the COPOM,” Ms. Rocha warned. She argued that if the Central Bank does not signal further rate hikes, it could send a message that it is unconcerned about the current de-anchoring of inflation expectations and is not committed to restoring credibility. “The moment calls for the Central Bank to indicate that this next Selic increase will not be the last,” she said.
Mr. Caruso from Santander, who also expects the COPOM’s inflation projection for the relevant horizon to fall to between 3.7% and 3.8%, attributed this mainly to exchange rate appreciation. However, he stressed that the gap to the 3% target “will still be significant.” “This opens the discussion for a slowdown in the pace of hikes, which would be reasonable if we assume the exchange rate remains at current levels,” he said. “The challenge lies in inflation expectations.”
While also emphasizing inflationary pressures and the de-anchoring of expectations, Raí Chicoli, chief economist at Citrino Gestão de Recursos, believes rising uncertainties should carry greater weight. “It is becoming very difficult for the COPOM to provide forward guidance at this stage. Most likely, they will try to maintain communication without committing to a specific next step. That doesn’t mean the COPOM will stop raising rates.”
As long as the committee’s projections continue to indicate the need for further rate adjustments, Mr. Chicoli does not expect the Central Bank to end the tightening cycle now. His forecast places the Selic rate at 15.25%, but given the high level of uncertainty, he sees little benefit in making a firm commitment on future moves. “There’s no way to predict what will happen with the U.S. economy or Brazil’s economy in the meantime,” he noted.
Regarding the COPOM’s statement, Mr. Chicoli believes it may acknowledge that growth was weaker than expected in the final quarter of last year and that the committee’s expectations may have been slightly more optimistic. “The communication will likely be more concise when addressing the slightly weaker activity, and this will be elaborated further in the meeting minutes. But I don’t think the tone will change much from January. Signs of a slowdown are still in their early stages, and it’s too soon to say there is a clear shift in trend,” he argued.
*By Gabriel Caldeira e Victor Rezende — São Paulo
Source: Valor International