Global Macro Research
Global Macro ResearchBrazil's fiscal and monetary policies remain at odds
Price pressures and market scepticism regarding fiscal policy will keep the Banco Central do Brasil on a tightening path over H1. The budgetary outlook will be a key determinant of the timing and extent of rate cuts thereafter. But an eventual decline in inflation and rate expectations should provide relief for assets.
Author
Tettey Addy
Emerging Markets Economic Analyst
Duration: 1 min
Date: 14 Feb 2025
Key Takeaways
- After the Banco Central do Brasil (BCB) delivers its signalled 100bps hike to 14.25% in March, the Selic rate will likely peak at 15% by May or June unless inflation and growth show signs of cooling sustainably.
- We expect a cautious cycle of rate cuts towards 12% over 2026, with the timing and extent of monetary easing being determined by markets’ sentiment regarding the fiscal path.
- Political considerations ahead of general elections in October 2026 – when President Luiz Inácio Lula da Silva is currently slated to seek re-election – and a large bill of mandatory expenditures raise the prospect of future fiscal slippages.
- Concerns that fiscal policy is offsetting monetary tightening could therefore push the Selic rate higher and risk it being kept there for longer.
- A large and rising share of public debt being linked to the Selic rate and inflation will maintain upward pressure on the debt burden over the medium term.
- Still, the lagged effects of the BCB’s tightening should eventually lower inflation and rate expectations. Outside of election uncertainty, this can facilitate a decline in yields and relief for Brazilian assets.
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