Despite decisive action by Brazil’s Central Bank during its most recent monetary policy meeting, inflation expectations are steadily worsening. Early in the year, some market participants began factoring in scenarios where the IPCA inflation rate exceeds 6% by December. With the exchange rate per U.S. dollar hovering above R$6, a challenging external environment for emerging markets, and uncertainties surrounding fiscal sustainability, investors maintain an upward bias on the Selic policy rate, suggesting it may need to exceed the already projected 14.25% by the Central Bank.
Since the last meeting of the Monetary Policy Committee (COPOM), inflation forecasts have increased significantly. The Central Bank’s Focus survey shows the median IPCA projection for 2025 rose from 4.6% to 5%, while estimates for 2026 climbed from 4% to 4.05% and for 2027 from 3.58% to 3.9%. Market prices also point to a worsening outlook, with implied inflation from NTN-B inflation-linked bonds maturing in 2026 jumping from 6.36% on December 11 to 6.94% on Monday (13).
Major financial institutions are painting even darker inflationary scenarios. Itaú Asset Management and Legacy Capital both forecast inflation at 6.1% by the end of 2025. Itaú sees the Selic rate reaching 15.75%. XP recently revised its estimates to a similar inflation level of 6.1% and a Selic rate of 15.5% by the end of the tightening cycle.
Juliano Cecílio, chief economist at Adam Capital, expects the IPCA to surpass 6% by year-end, driven by lagged price adjustments that will sustain inflationary pressures despite an expected economic slowdown starting in the second half.
“Residential rents and service inflation respond to labor market dynamics with significant delays. For us, service inflation will likely end the year near 7%. Industrial goods inflation, previously at comfortable levels, is now expected to exceed 5%, fueled by exchange rate pass-through. Additionally, food inflation is projected to hit around 9%. With these key groups trending upward, low inflation becomes difficult to envision,” Mr. Cecílio said.
Even as activity slows due to tighter monetary policy, inflation is unlikely to decline in time, he added. “The lag is too long. While a less turbulent external environment could strengthen the real and help, global challenges continue to drive currency depreciation not only in Brazil but in several countries.”
Adam Capital projects a Selic rate of 15% at the peak of the tightening cycle, though Mr. Cecílio noted limited confidence in the estimate, citing uncertainty about the reaction function of the Central Bank’s new leadership.
“The Central Bank tries to do what it can: signal and respond with the tool it has, which is basically the interest rate. Monetary policy works, it always has, but fiscal policy also works, and parafiscal policy as well. All this is in the context of a difficult external scenario. There is an increasing notion that the will not have much room to cut interest rates and China should continue to slow down. These are not good news for Brazil. The Central Bank’s job becomes much harder, despite its efforts,” Mr. Cecílio said.
Marcelo Fonseca, chief economist at Reag Investimentos, warned that even if the Selic rate climbs to 16%, inflation could double the Central Bank’s 3% target by 2025. “Inflation is clearly accelerating to very high levels. Core inflation and underlying services are running at approximately 6% and 8.5%, respectively,” Mr. Fonseca said.
He pointed to an overheated labor market, wages growing faster than productivity, and expansionary fiscal policies as key drivers of this trend. “This combination heavily burdens monetary policy, exacerbating risk premiums and pushing the debt-to-GDP trajectory further onto an unsustainable path,” Mr. Fonseca warned, calling for fiscal policy to play a more effective role in controlling inflation.
Apex Capital, which expects a Selic rate of 15.75% by mid-2025, predicts no room for rate cuts even in 2026. Chief Economist Alexandre Bassoli projected a 6.5% IPCA for 2025 and highlighted the impact of inflation expectations on actual outcomes. “When higher inflation is anticipated, it tends to materialize,” Mr. Bassoli said.
He attributed the worsening inflation outlook to an overheated economy and the real’s sharp depreciation. “Exchange rate pass-through tends to be stronger when there’s less slack in the economy,” he explained, referencing an Ibre-FGV study estimating that Brazil’s economic output is 4 percentage points above potential, the most positive output gap in 30 years.
Mr. Bassoli expects inflationary pressures to persist, with much of the real’s depreciation yet to impact prices. “This inflationary scenario is closely tied to fiscal policy,” he noted.
With a Selic rate close to 16% by the end of 2026, as projected by Apex, measures to reduce mandatory expenses will become increasingly necessary to restore macroeconomic balance. “We would like to see a soft landing for the economy, but the longer it takes for this deceleration to happen, the greater the chance of a hard landing.”
Mr. Fonseca of Reag echoed concerns about Brazil’s rising debt financing costs. “The debt burden is a critical issue. Interest rates are absurdly high, driving up the cost of financing the debt. There’s no Central Bank’s accountability for this, as risk perception—shaping the yield curve—continues to climb,” he said.
