(Bloomberg) -- Brazil analysts raised their key rate forecasts for next year as the nation’s president reignites fears of even looser fiscal policy ahead and the next central bank chief highlights strong economic growth.
The benchmark Selic will hit 11% at year-end 2025, up from the prior estimate of 10.75%, according to a weekly central bank survey published Monday. Estimates for borrowing costs this December stayed unchanged at 11.75%.
Latin America’s largest economy has proved more resilient than expected during most of this year, prompting policymakers to kick off a tightening cycle in September by lifting borrowing costs to 10.75%. Low unemployment, a weaker real and an increase in families’ disposable income due in part to higher government transfers are spurring fears of inflation pressures.
“Brazil’s economy continues to give signals of more resilience and stronger activity,” Gabriel Galipolo, the central bank’s current monetary policy director and next governor, said at an event in Sao Paulo later on Monday.
The nation’s firm labor market suggests there will be a more costly and slower disinflation process, Galipolo said. Services price growth remains above the central bank’s 3% target, and the real is “persistently” weaker, he said.
“Given the volatility, we are data dependent and more reactive, trying to keep up with these recent surprises,” Galipolo said.
Economic activity rose 0.2% in August, above the 0.1% median estimate from analysts in a Bloomberg survey. From a year prior, the gauge gained 3.1%, according to a separate report also published by the central bank on Monday.
Brazil Inflation
Analysts in the weekly survey expect inflation at 4.39% this December and 3.96% at the end of next year, both figures well above the bank’s target. In a twelve-month horizon, cost-of-living rises are seen at 3.96%.
Consumer prices rose 4.42% in September from a year prior, nearing the top of the central bank’s tolerance range as food and energy costs jumped on the back of severe drought.
Policymakers have refrained from giving specific guidance on how large their next rate hikes will be. Traders bet the Selic will surpass 13% in 2025.
Investors are becoming more concerned about President Luiz Inacio Lula da Silva’s pledges to balance the budget. Last week, the leftist president said he wants income tax exemptions beyond his campaign pledge for workers with salaries of up to 5,000 reais ($893), without giving details on how he would compensate for any loss in revenue.
Central bankers have warned of the need to balance the country’s budget amid an overheated economy. At Monday’s event, Galipolo also supported Finance Minister Fernando Haddad’s efforts for fiscal balance, saying the minister remains “clear” on his goals.
“We expect a reduction in fiscal stimulus,” Galipolo said. A lack of “positive” budget news can quickly increase investors’ skepticism, though the economic team remains focused on a transparent and clear spending program, Galipolo said. “But at the bank we have our own goal, which guides our reaction,” he said.
--With assistance from Barbara Nascimento.
(Updates with Galipolo comments starting in fourth paragraph)
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