The report reveals strong economic activity and inflation above target until 2027
09/27/2024
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The Central Bank’s inflation projections, which remain above the target throughout the forecast horizon, as highlighted in the Inflation Report released on Thursday, have strengthened expectations of further tightening the Selic rate in the coming months. Financial institutions are now adjusting their forecasts to reflect a higher policy rate.
However, Central Bank President Roberto Campos Neto avoided signaling future moves, emphasizing a “data-dependent” approach. “We need more data and more time to understand how [the cycle] will proceed,” he said.
Since the Central Bank’s Monetary Policy Committee (COPOM) began its rate-hike cycle last week and the minutes released on Tuesday (24) echoed the same hawkish tone, the Inflation Report has been perceived as another firm signal from the monetary authority.
The report shows that inflation projections fail to return to the target in any timeframe. The Central Bank estimates the 2024 IPCA at 4.3%, with inflation at 3.7% in 2025. In the first two quarters of 2026—key periods in the relevant monetary policy horizon—inflation is forecast at 3.5%. Even in the first quarter of 2027, the most distant projection, inflation stands at 3.2%, still above the 3% target pursued by the COPOM.
“The Central Bank anticipates the need for restrictive monetary conditions until at least the end of 2026, and the market’s reference trajectory for the Selic policy rate and the real do not align with inflation projections meeting the 3% target over the next two and a half years,” said Alberto Ramos, head of macroeconomic research for Latin America at Goldman Sachs.
The COPOM revised its output gap projections, a measure of economic slack. The indicator is now estimated at 0.5% for the second and third quarters of 2024, up from 0% to 0.2% in the previous report. For the fourth quarter of 2024, the output gap is projected at 0.3%, down from 0.4%. Looking ahead to the first quarter of 2026, the estimate remains at 0.3%.
The data presented in the report has led many financial institutions to conclude that the Selic rate may need to be higher than the 11.5% projected in the Focus Report to bring inflation back to target. Throughout the day, some institutions, including BTG Pactual, began expecting a Selic rate of 12.5% by the end of the tightening cycle.
BTG now foresees three consecutive hikes of 50 basis points in November, December, and January, followed by a final 25-basis-point increase in March.
In a note from BTG’s chief economist for Brazil, Claudio Ferraz, the bank pointed out that the Inflation Report data sends a “hawkish” message, reinforcing COPOM’s communication since last week’s meeting.
BTG highlighted the “substantial revision” in 2024 economic growth projections and noted that the output gap has moved into positive territory. Despite this, the inflation projection for the second quarter of 2026, just after the COPOM’s relevant monetary policy horizon, still shows a high Extended Consumer Price Index (IPCA) of 3.5%.
“The September communication shows that the COPOM acknowledged stronger-than-expected economic activity and sees a more challenging process in converging inflation to the target, citing upward asymmetry in its balance of risks,” the economists added.
The Buysidebrazil consultancy, founded and led by economist Andrea Damico, mapped a similar trajectory for the Selic rate after the release of the Inflation Report. The firm highlighted that the revision of the output gap adds 35 basis points to inflation by the end of the first quarter of 2026, which falls within the relevant horizon for monetary policy. According to their calculations, this increase is partially offset by the higher interest rate outlook, which reduces the inflation projection by 25 basis points.
Marcelo Fonseca, chief economist at Reag Investimentos, noted that the Inflation Report did not introduce any new information beyond what was outlined in the statement and minutes of the last COPOM meeting. Still, it implicitly suggests that the Central Bank will accelerate the Selic rate hike to 50 basis points starting in November, Mr. Fonseca said.
“The Central Bank is clearly committed to ensuring inflation convergence, and to achieve that, it will need to deliver a longer tightening cycle than most analysts and the market initially anticipated,” explained Mr. Fonseca, whose projection is also for the Selic rate to reach 12.5%, with the cycle concluding in March. Reag revised its forecast shortly after the previous COPOM meeting.
While the COPOM started the current tightening cycle with a more modest 25-basis-point increase, Mr. Fonseca believes this decision was specific to the context of the September meeting.
During a recent interview, Mr. Campos Neto clarified that no discussion took place regarding a more aggressive 50-basis-point hike in week three of September. “Had a group considered a 50-basis-point increase, we would have noted it in the minutes. Since it’s not there, that debate didn’t happen,” Mr. Campos Neto explained.
When asked about the recent IPCA figures, Mr. Campos Neto acknowledged some qualitatively better signs, reiterating his previous comment that short-term inflation could be “a little better.” However, he also expressed concerns over future price dynamics, particularly food prices related to ongoing drought conditions. Brazil’s mid-September inflation index IPCA-15—known as a reliable predictor for official inflation—showed a 0.13% increase in September, significantly below market expectations.
The release of the Inflation Report notably impacted the interest rate market, especially for intermediate-term contracts. By the end of the session, the January 2026 DI rate rose from 12.085% to 12.20%, while the January 2027 DI increased from 12.11% to 12.245%.
Based on the yield curve, projections now indicate that the Selic rate could reach 12.75% by 2025.
Regarding market reactions, Mr. Campos Neto stated it is not the Central Bank’s role to “keep commenting on whether we agree or disagree with the market,” after being questioned about his earlier remarks concerning a potential overreaction in risk premiums.
By Gabriel Roca, Gabriel Caldeira, Anaïs Fernandes, Gabriel Shinohara, Alex Ribeiro, Victor Rezende, Estevão Taiar — São Paulo and Brasília*
Source: Valor International