A (Near) Perfect Storm

BRAZIL ECONOMICS - Report 12 Nov 2024 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

Inflation forecasts point to a high likelihood of exceeding the upper limit of the target this year. Meanwhile, the Central Bank's inflation projection for the 12 months ending in June 2026, the relevant horizon for monetary policy, is 3.6%, indicating the need for an adjustment of approximately 2 percentage points in the benchmark interest rate beyond what is already expected in the Focus report to reach the target, which we consider unlikely.

Moreover, we believe these projections are based on optimistic assumptions regarding the neutral interest rate and the output gap, and they also depend on fiscal policy, which is expected to remain expansionary. We anticipate that the Central Bank will continue to target inflation above 3%, increasing the risk of its breaching even the upper limit of the tolerance interval in the face of unexpected shocks. The result is likely to be persistently above-target inflation.

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