Morgan Stanley Cuts Brazil’s 2025 Interest Rate Forecast as Tightening Cycle Nears End

Morgan Stanley analysts reduced their forecast for Brazil’s benchmark Selic interest rate to 14.75% for 2025, down from their previous projection of 15.75%.

Economists Ana Madeira, Thiago Machado, and Ioana Zamfir based this revision on emerging economic signals that suggest Brazil’s monetary tightening cycle could conclude earlier than anticipated.

The Brazilian real has strengthened since December while economic activity data shows slight negative surprises. These factors create space for Brazil’s Central Bank to potentially halt its rate hike cycle sooner than previously expected. Market pricing now supports this more moderate outlook.

Brazil’s Central Bank raised the Selic rate to 14.25% in its latest decision, marking the highest level since October 2016. The bank faces persistent inflation challenges amid rising food and energy prices across the Brazilian economy.

Morgan Stanley now anticipates only one additional 0.5 percentage point increase at the May Monetary Policy Committee meeting. The bank also lowered its 2026 year-end Selic projection from 12.75% to 12.25%, though still expects rate cuts to begin in the second quarter of 2026.

Slower Growth and Shifting Monetary Policies

Economic growth will likely moderate in the coming years. Forecasts show GDP growth slowing to approximately 1.6% in 2025 after three consecutive years of roughly 3% expansion. Tighter monetary conditions directly contribute to this expected slowdown.

The bank’s adjusted outlook affects their investment recommendations. Morgan Stanley closed positions that benefited from steepening interest rate futures. They now recommend positions that would gain from falling rates, specifically targeting January 2029 contracts.

Currency markets should feel the impact of these monetary policy shifts. Morgan Stanley predicts the dollar could fall to around R$5.40 against the Brazilian real. The central bank’s already implemented monetary tightening supports this currency outlook.

Brazil continues navigating complex economic challenges. The interaction between monetary policy, inflation pressures, fiscal constraints, and global economic conditions will shape outcomes throughout 2025 and beyond.

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