Citi analysts forecast a steeper increase in Brazil's Selic rate than previously anticipated, citing the need to address persistent inflationary pressures. Expectations now include a 100 basis points (bps) rise, to be implemented in increments of 25 bps at upcoming meetings. This adjustment is in response to inflation forecasts exceeding targets, ongoing deterioration in inflation expectations, adverse exchange rate movements, and imbalances in demand and supply affecting activity and labor markets.
The analysts point to a 20bps deviation between the Central Bank of Brazil's (Copom) inflation forecasts for the first quarter of 2026 and the established target, which is 3.2% against the 3.0% goal. To reel inflation back to the target, Citi believes Copom will need to increase the Selic rate by the indicated 100bps. The projected path places the Selic rate at 11.25% by the end of 2024, 11.0% at the close of 2025, and 10.50% by the end of 2026.
The normalization of monetary policy is anticipated to commence in the fourth quarter of 2025, according to Citi's analysis. This process would gradually adjust interest rates towards a neutral stance that neither stimulates nor restrains economic growth.
Furthermore, Citi indicates that the risks associated with the expected tightening cycle are skewed to the upside. This suggests that a rate increase larger than the forecasted 100bps is more probable than a smaller hike. The firm's outlook implies that Copom may take more aggressive action if inflationary trends do not subside as anticipated.
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