Brazil economists lifted their forecast for the benchmark Selic rate to 13.25% for the end of this year on Monday, while also raising their inflation outlook for 2026 for the 10th straight week. The move reflects a stubborn mix of price pressure, softer growth and fresh stimulus that is complicating the central bank’s next steps.
The new rate estimate was up from 13%, and analysts now see annual inflation ending this year at 4.92%, slightly above the previous 4.91% forecast. That leaves prices well above the 3% target, even after policymakers trimmed borrowing costs to 14.5% and said further easing can be adjusted according to incoming data. For households and companies, the message is that borrowing costs are still likely to stay high for longer.
The inflation pressure has built in a year marked by an energy shock stemming from the Iran war, while President Luiz Inacio Lula da Silva has pushed new stimulus measures as he seeks reelection in October. His administration has rolled out subsidies for gasoline and diesel, along with a program to help families renegotiate billions of reais in debt. Those steps are meant to ease the strain on consumers, but they also risk keeping demand firmer at a time when price gains are already running hot.
Brazil’s annual inflation accelerated to 4.39% in April from 4.14% in March, according to the national statistics agency, which reported the reading on May 12. Interest rate swaps with contracts ending in January 2029 jumped after the figures were released, a sign that traders quickly reassessed how long restrictive policy may need to stay in place. The market reaction underscored how sensitive expectations have become to even modest surprises in the price data.
The debate over rates comes as activity is losing momentum. Brazil’s central bank proxy for gross domestic product showed economic activity dropped 0.67% in March from February, even as the February monthly rise in the same measure was revised up to 0.87% from 0.60% initially. That mix — slower activity, sticky inflation and a government adding support — leaves policymakers with a narrow path between protecting growth and keeping prices anchored.
The central bank has already signaled that its easing cycle is not fixed in stone, and Monday’s data only strengthens the case for caution. Economists may keep edging up their forecasts if inflation expectations continue to drift, but the bigger test will be whether the recent slowdown in activity is enough to cool prices without forcing a sharper policy response later this year.
