UBS BB forecasts Brazil’s Central Bank will raise the Selic rate to 15.25% by May, driven by persistent inflation and economic pressures.
This projection follows the January inflation data (IPCA), which revealed a monthly slowdown to 0.16% from 0.52%, with the annual rate easing slightly to 4.56%. Despite this deceleration, inflation remains above the Central Bank’s target of 3%, prompting further monetary tightening.
The Monetary Policy Committee (Copom) already signaled a 1 percentage point hike in March, with UBS BB economists Alexandre de Azara, Fabio Ramos, and Rodrigo Martins predicting another similar increase in May.
If realized, this would bring the Selic rate to its highest level since the early 2000s. The Central Bank aims to anchor inflation expectations and stabilize the economy amid mounting fiscal and external challenges.
Food prices contributed significantly to January’s inflation slowdown, with fresh produce and meat costs declining after sharp increases in late 2024. However, regulated prices rose unexpectedly, and a one-time discount on electricity bills reduced the IPCA by 0.55 percentage points.
Without this effect, monthly inflation would have reached approximately 0.7%. Core inflation measures also showed signs of acceleration, averaging 0.61% monthly and 4.5% annually. Currency depreciation has exacerbated inflationary pressures, with the Brazilian real trading above R$6 per U.S. dollar.
Brazil’s Inflation and Economic Outlook
This has increased import costs and amplified price pass-through effects, particularly for industrial goods. UBS BB expects February inflation to rise by 1.3%, pushing the annual rate to 5.1%, with a peak of 5.5% projected in April before moderating to 5% by year-end.
The anticipated rate hikes reflect broader economic concerns, including fiscal imbalances and global uncertainties. Brazil’s fiscal policies have strained monetary policy effectiveness, while external factors like U.S. Federal Reserve decisions and commodity price trends add complexity.
Economists warn that high interest rates could dampen growth, with GDP expected to slow from 3% in 2024 to around 2% in 2025. UBS BB predicts the Selic rate will remain at 15.25% throughout 2025.
This underscores the Central Bank’s commitment to combating inflation despite risks of economic slowdown and rising public debt costs. This tightening cycle highlights Brazil’s struggle to balance inflation control with sustainable growth in a volatile global environment.