Inflation expectations deteriorate further in Brazil

Brazil’s short-term inflation expectations continue to increase as long-term ones have “cemented” above the inflation target of 3 percent, says Goldman Sachs’s leading economist in Latin America, Alberto Ramos, when looking at the latest Focus Report — a weekly survey the Central Bank carried out with top-rated investment firms. 

Inflation expectations for end-2024 and 2025 increased to 4 and 3.87 percent, respectively, while the median of projections for 2026 and 2027 remained unchanged for several weeks, at 3.60 and 3.50 percent, respectively. 

These numbers reflect the market perception that fiscal targets are unlikely to be met and that the authorities “are inclined to accommodate inflation above the target,” writes Mr. Ramos in a report to investors.

As previously explained by The Brazilian Report, in central bank jargon, “unanchored expectations” refer to divergent inflation projections within an 18-month window. Estimates for 2024 and 2025 inflation in the models of the Central Bank’s Monetary Policy Committee — the body responsible for deciding the country’s benchmark interest rate — have moved further above the 3 percent target from 3.8 to 4 percent for this year, and from 3.3 to 3.4 percent for the next. This was one of the main factors leading the committee to keep the Selic rate unchanged at 10.5 percent last month.

As we discussed in the previous episode of our weekly podcast Explaining Brazil, President Luiz Inácio Lula da Silva has created an “expectation crisis” with his reluctance to cut public spending and criticism of the Central Bank’s cautious stance, especially towards the authority’s chairman Roberto Campo Neto. 

In April, the government threw in the towel and changed its 2025 fiscal target from a primary surplus of 0.5 percent of GDP to zero deficit. If achieving the zero target this year is already considered impossible by most analysts, this decision suggested continued fiscal deterioration and the Lula administration’s lack of commitment to the issue.

In the minutes of its last meeting, the Monetary Policy Committee highlighted the still adverse external scenario, especially the heightened and persistent uncertainty about the beginning of the easing cycle in the U.S., but it also stressed that levels of activity and job creation “continue stronger than expected.” 

The median of the Focus report’s projections for the benchmark interest rate remained at 10.50 percent for the end of 2024 and 9.50 percent for 2025. Only some improvement in expectations surrounding the country’s commitment to its fiscal target could change that, say analysts. 

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