Analysts lower interest rate forecasts well below Central Bank signals

This week’s Focus Report, a bulletin for which the Central Bank surveys the country’s leading financial institutions, shows that economists are forecasting a benchmark interest rate for Brazil at the end of 2023 that is much lower than what the monetary authority signaled at the last meeting of the Monetary Policy Committee (Copom), where the Selic rate was reduced by 0.50 p.p. to 13.25 percent per annum.

The median of analysts’ estimates fell from 12 percent to 11.75 percent at the end of 2023, from 9.25 percent to 9 percent in 2024, and from 8.75 percent to 8.50 percent in 2025. 

In the statement released immediately after last week’s decision, however, Copom’s message was quite different. It cited several risks — such as “a greater persistence of global inflationary pressures and a stronger-than-expected resilience of services inflation due to a narrower output gap” — as reasons to not declare victory over inflation. It also stressed that although cuts of the same magnitude could be expected for the following meetings, it would maintain “the necessary contractionary monetary policy for the disinflationary process.”

“Copom made it clear that it will leave the Selic rate in contractionary territory to anchor expectations even more, but it seems to me that the economists consulted decided to place the rates they understand as neutral (or even below neutral) at the end of the cycle, which doesn’t seem feasible for the time being,” says economist André Perfeito, adding that the neutral rate is around 10 percent. 

While lowering their forecasts for Selic, the institutions surveyed by Focus maintained their expectations for the IPCA, the official inflation index, for 2023 and 2025 at 4.84 percent and 3.50 percent, respectively, while lowering their projections for rising prices next year by 0.1 percentage points to 3.88 percent.

Brazil’s official consumer price index (IPCA) fell by 0.08 percent in June, with the 12-month rate slowing to 3.16 percent — below the inflation target (3.25 percent) for the first time since October 2020. The disinflationary process, however, tends to slow down in the second half of the year due to year-on-year comparisons — in 2022, July, August, and September saw sharp drops in prices due to tax exemptions on essential items such as fuel during last year’s electoral campaign.

Tomorrow, the Central Bank will release the minutes of the meeting, a document in which it usually details its decisions. In addition to confirming what it said in its statement, analysts expect the Central Bank to signal a relatively quick cycle of cuts. As 2024 is a year of regional elections, it would make sense to interrupt the process in the second quarter before the final stretch of the dispute.

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