With no clear catalyst for improvement in Brazilian assets, 2025 begins under pressure as fiscal risks and the prospect of higher interest rates weigh on domestic markets. The close of 2024 was marked by widespread stress: the exchange rate reached record nominal highs, contained only by constant Central Bank interventions in the spot market. Meanwhile, future interest rates soared to levels unseen since 2016, during the economic crisis of Dilma Rousseff’s second term.
The exchange rate appreciated 27.35% against the real in 2024, marking its sharpest annual increase since 2020. The rate advanced 2.99% in December alone, closing the year at R$6.1797 per dollar.
The Ibovespa also struggled, dropping 10.36% in 2024—the worst performance since 2021—with a 4.28% decline in December, ending at 283 points.
Future interest rates reached around 16%, with the Interbank Deposit (DI) contract maturing in January 2027, closing at 15.89%, a sharp rise from below 10% at the start of the year.
The deterioration of Brazilian assets was primarily driven by market uncertainty over fiscal policy and concerns about public debt sustainability—issues that remain front and center as 2025 begins. This uncertainty has led to a rise in the risk premium and increased expectations for the Selic policy interest rate against a backdrop of subdued economic activity and inflationary pressures.
The Central Bank’s Focus survey at the end of 2024 highlighted these concerns, showing a market expectation for Brazil’s basic interest rate to reach 12% by the end of 2025, up from the previous forecast of 11.75%. Inflation forecasts also edged higher, with the IPCA (Brazil’s benchmark inflation index) projection for 2025 rising from 4.84% to 4.96%.
Santander Brasil’s economics team projects the Selic rate will peak at 15.5% in June, following two additional hikes of 100 basis points and smaller increases of 75 bp and 50 bp. “These adjustments largely reflect the deterioration in the Central Bank’s inflation projections and the revised neutral rate estimate. However, the cycle could extend further, given the diminished effectiveness of monetary policy and the potential for greater exchange rate pass-through to prices in an environment of a positive production gap,” the team noted in a report.
The sharp depreciation of the real against the dollar at the close of 2024 prompted a flurry of Central Bank interventions in the spot market during a period of seasonal dollar outflows. In December alone, the monetary authority intervened nine times, including a final-session sale of US$1.815 billion, which prevented the real from devaluing further by year-end.
Marcos Weigt, treasury director at Travelex Bank, noted that market liquidity should normalize by the second week of January, reducing the need for continued interventions. “It’s appropriate to intervene when liquidity is insufficient. There were significant outflows in an illiquid market, so the Central Bank stepped in with an auction,” Mr. Weigt said.
Market professionals are cautious about 2025, citing a bleak domestic outlook and the heightened focus on U.S. markets following Donald Trump’s election. Marcelo Okura, head of brokerage at UBS BB, expressed skepticism about significant changes in Ibovespa’s trading volume. “It will likely remain near current levels, reflecting the loss of relevance we experienced this year,” Mr. Okura said.
