Itaú economist warns stimulus may delay Brazil’s slowdown

Brazil’s GDP expanded 1.1% in the first quarter of 2026 compared with the previous three months, according to data released on Friday (29) by the Brazilian Institute of Geography and Statistics (IBGE). “This GDP report shows an economy with signs of reacceleration,” Mesquita noted.

Economic activity started the year strongly but is unlikely to maintain the same pace, he said, because “a slowdown is, to some extent, already built into the outlook.” Even so, he added, the GDP composition points to “a resilient economy.”

A prolonged or intensified conflict in the Middle East represents a downside risk to Brazil’s GDP in 2026 because it would also weigh on global growth, Mesquita noted. On the other hand, additional government stimulus measures create upside risks for activity.

A former Central Bank director, Mesquita said he is “somewhat concerned” about recent inflation dynamics and inflation expectations, particularly at longer horizons. “It suggests that the market has a fundamental question about the Central Bank’s conduct,” he said.

At the same time, Mesquita said he has “no criticism whatsoever” of the monetary authority’s performance. “They are making a major effort. The economy was hit by a shock during the process. In situations like this, central banks wait to see how things evolve. It cannot react hastily or prematurely. But we know the Central Bank’s flight plan is flexible and constantly evolving,” he noted.

The economist also described it as “entirely appropriate” for policymakers to avoid providing explicit forward guidance. “The Central Bank cannot project a sense of certainty in such an uncertain environment.”

Some normalization of the situation in the Middle East in the coming months, even if insufficient to return oil prices to prewar levels, could contribute to a weaker dollar globally and limit the chances of a sharp depreciation of the Brazilian real during an election year, which tends to be more volatile, he said.

“We see the currency ending the year between R$5.10 and R$5.20 to the dollar, not far from current levels, with some uncertainty surrounding fiscal policy at home and a broader trend of dollar weakness globally, with one factor largely offsetting the other,” Mesquita said.

In his view, regardless of the election’s outcome, the next administration will likely adopt a more restrictive fiscal stance. Asset prices, he said, already reflect expectations that a fiscal-adjustment process will begin in 2027.

Mesquita, who has served as Itaú’s chief economist since 2016, is leaving the role, which will be assumed in July by former Central Bank director Diogo Guillen. During the transition, Mesquita will continue working with the bank as a consultant overseeing macroeconomic functions. Below are excerpts from the interview:

Valor: Did Brazil’s 1.1% GDP growth in the first quarter surprise you?

Mario Mesquita: We were projecting something slightly above that, but overall it was consistent with a scenario in which the economy grows around 2% this year, perhaps a bit more. This time, agriculture was not a highlight, as it showed a significant slowdown. What really helped was the services sector, the most important part of the economy. GDP also showed a recovery in consumption and robust private-sector demand. This GDP report points to an economy showing signs of reacceleration at a time when the Central Bank is easing monetary policy, and the government is adopting measures to support demand.

Valor: What is your outlook for GDP in the coming quarters?

Mesquita: The economy started the year strongly. It should not maintain that pace. A slowdown is to some extent already priced in, but even with first-quarter growth coming in slightly below what we expected, the composition of GDP points to a resilient economy. Consumption is performing well, and investment has recovered. Investment fell in the previous quarter, and there was also the one-off factor of an imported oil platform. But overall, it is robust growth, with private-sector demand making an important contribution.

Valor: Several new federal programs have been announced in recent months. Did they show up in first-quarter GDP, or will they show up later?

Mesquita: The additional stimulus creates an upside bias. Looking at risks, a downside risk would be a prolonged or intensified conflict in the Middle East. Domestically, when we look at household credit this year, growth has been significant, while lending to companies has been less dynamic. Forces are moving in opposite directions. Many of the stimulus measures are linked to credit markets and support demand. In addition, there are social transfers and pension-related payments, all of which quickly become demand. That changes the backdrop for monetary policy. We see GDP growing on the back of domestic demand and private-sector activity, and the government’s measures are aimed at sustaining household consumption.

Valor: Could that delay the economic slowdown analysts have been expecting?

Mesquita: It could, just as labor-market adjustments could. Although the latest employment data were weaker, unemployment remains very low by historical standards when seasonally adjusted. And if we look at what the Central Bank calls cyclical GDP, it actually accelerated. Perhaps that is the key takeaway from this GDP release: the acceleration of the cyclical component of GDP, which is more sensitive to monetary policy, at a moment when the Central Bank is cutting rates, and the government is introducing new stimulus measures.

Valor: Given all of that, can the Central Bank continue cutting rates?

Mesquita: In any economy, the more stimulus you receive from other sources, the more you occupy the space that would otherwise belong to monetary policy. There are other factors too—expectations, exchange rates, and so on. The Central Bank also continuously updates its relevant policy horizon. But conceptually, the more stimulus comes from elsewhere, the less room monetary policy has. And this is happening in an economy already operating close to what appears to be its potential.

Valor: Was the disinflation process before the Middle East conflict fragile?

Mesquita: Brazil targets headline inflation, and I agree with that approach because that is the inflation people actually experience. The Central Bank cannot distinguish between “good” and “bad” disinflation. But when disinflation depends heavily on exchange-rate movements and imported goods, we know the exchange rate is highly volatile and difficult to predict. That kind of disinflation tends to be more fragile than one driven by a widening output gap. That had been a feature of Brazil’s disinflation process until the global economy was hit by the oil shock. Oil is obviously critical for fuel prices, but it also influences inflation in many other ways. There is also the El Niño issue, although its inflationary impact is likely to be greater next year. In the short term, inflation readings will remain under pressure. Monetary policy is calibrated to affect inflation over the relevant horizon, not instantly. But initial conditions matter. That is why we are somewhat concerned about the recent inflation dynamic.

Valor: Inflation expectations are rising. Is that also a concern?

Mesquita: Yes, because expectations are important both for actual inflation outcomes and for the Central Bank’s models. Expectations had been above target and were beginning to improve and converge when the shock hit. That concerns me and certainly concerns the Central Bank as well. Especially when we look at longer-term expectations. In the short run, a shock occurs, and expectations naturally rise. But when longer-term expectations move higher, it suggests the market has a fundamental question about the Central Bank’s conduct.

Valor: How do you assess the Central Bank’s performance?

Mesquita: I have no criticism of what the policymakers have done. They are making a major effort. The economy was hit by a shock during the process. In situations like this, central banks wait to see how things evolve. They cannot react hastily or prematurely. We know the Central Bank’s approach is flexible and adapts as new data emerge and forecasts change. Our Central Bank is certainly processing the same information we are and incorporating it into its models and projections.

Valor: Have you been satisfied with the Central Bank’s communication since it began cutting rates in March?

Mesquita: We may disagree on details here and there, but broadly speaking, it has been good. It is appropriate that they avoid providing explicit guidance and instead leave a range of possibilities on the table. The monetary authority cannot project certainty in such an uncertain environment. The uncertainty facing policymakers is no different from the uncertainty facing markets. In fact, all central banks are dealing with that.

Valor: The disinflation process depended heavily on currency appreciation. Will that continue, or could the presidential election change the picture?

Mesquita: Sometimes we forget that an exchange rate involves two currencies. The dollar was falling in Brazil largely because it was weakening globally. When the dollar enters a global trend, the exchange rate here tends to follow. Election years generally bring more volatility and are not typically associated with significant currency appreciation. But we should not underestimate the global backdrop. If the Middle East conflict subsides in the coming months—and we never know exactly when that will happen or when the Strait of Hormuz will fully reopen—we may return to a weaker-dollar environment. That would limit the chances of a major depreciation of the real. We see the currency ending the year between R$5.10 and R$5.20 to the dollar, not far from where it is now, with domestic fiscal uncertainty offset by broader global dollar weakness.

Valor: When you mention fiscal uncertainty, are you referring to new election-year stimulus measures or to what presidential candidates may propose?

Mesquita: Both. We are looking at election-year programs that create permanent fiscal implications, such as tax exemptions and lasting revenue losses. We are also looking beyond 2027. Brazil’s public debt is growing by about 4 percentage points of GDP per year. We know that is unsustainable and that, regardless of the election result, the next government will likely need to address fiscal issues more directly. Fiscal policy under the next administration is likely to be more restrictive. Investors continue financing the government because they expect a fiscal-adjustment process to begin. I do not think there will be a magic solution that immediately delivers the primary surplus needed to stabilize debt in 2027. But asset prices reflect expectations that such an adjustment process will begin then.

Valor: Long-term nominal and real interest rates remain very high. Does that suggest market skepticism about future fiscal adjustment?

Mesquita: Real interest rates have been falling for both good and less positive reasons. They have fallen because the Selic policy interest rate is coming down, but also because inflation expectations are rising. We tend to focus on nominal rates, but real rates have been declining for some time. When you combine lower real rates with new stimulus measures being introduced every few days, as has been reported, the effectiveness of monetary policy is diminished. New credit products are performing very well—for example, private-sector payroll loans, which are a highly positive innovation for the financial system and for consumers and which support economic growth. There is nothing wrong with that; it is an excellent product. But in economics, everything has consequences. One consequence of these stimulus measures is that they reduce the effectiveness of monetary policy.

Valor: The interest-rate curve implies a Selic rate of around 14% at year-end. Do you consider that fair?

Mesquita: At the moment, our forecast is for the cycle to end at 13.25%, but we are constantly reviewing the outlook as new data come in. If the outcome differs from 13.25%, it is more likely to involve fewer cuts rather than more.

Valor: What is your baseline scenario for the Middle East conflict?

Mesquita: We think there will be a higher risk premium embedded in oil prices because uncertainty about supply has increased. Previously, we expected oil to end the year around $60 to $70 per barrel. Now we see it more in the $80 to $90 range. We still expect prices to ease once traffic through the Strait of Hormuz begins to normalize. But that will not happen overnight. Clearing mines and restoring normal shipping flows will take time. Even then, it does not appear that oil will return to previous levels, especially considering that several countries have drawn down strategic reserves and will need to rebuild them. Overall, we view the war as a drag on the global economy. For Brazil, higher oil prices have a direct positive effect because the country is a net oil exporter. But when we consider the impact on global growth and the reduced scope for monetary easing, the net effect is slightly negative. That is why I describe a prolonged conflict as a downside risk to GDP.

Valor: From a strictly macroeconomic perspective, does the U.S. decision to classify Brazilian criminal organizations as terrorist groups affect Brazil’s economy or capital flows?