The latest Focus Report, the Central Bank’s weekly survey of the country’s leading financial institutions, shows that market expectations are increasingly converging toward the inflation targets — which also means that projections for Brazil’s Selic benchmark interest rate are falling.
The median market forecast for inflation in 2023 is now 3.8 percent. This is two full percentage points lower than a month ago and, more importantly, within the target’s tolerance band (which stretches to 4.75 percent). Inflation forecasts for the next three years have also fallen.
The improvement in expectations increases the likelihood that the Central Bank will cut rates at its next meeting in August. Moreover, there may even be room for the “consistent” cuts that Finance Minister Fernando Haddad has been calling for.
The median forecast for the year-end Selic is now at 12 percent — half a percentage point lower than four weeks ago and 1.75 points below the current level.
In last week’s inflation report, the Central Bank indicated that the probability of the consumer price index remaining above the target ceiling in 2023 had fallen from 83 percent in March to 61 percent in June. However, as we have shown, the monetary authority does not see inflation effectively converging to the target until 2025.
Despite the market’s growing optimism, among the risks of rising inflation, the report cites a greater persistence of global inflationary pressures, uncertainties about the fiscal framework and its impact on expectations of the public debt trajectory, and a greater or prolonged discouragement of inflation expectations.
The fact that the National Monetary Council (CMN), formed by Central Bank head Roberto Campos Neto and the finance and planning ministers, Fernando Haddad and Simone Tebet, changed the parameters of the inflation targets starting in 2025, has led the market to believe that both the government and the monetary authority are increasingly on the same page when it comes to inflation and interest rates.
Instead of setting annual inflation targets to be met each calendar year, from 2025 the monetary authority should pursue its price goals within a “continuous” timeframe, a rolling 12-month target. The target of 3 percent for 2024 and 2025 was maintained and is the same target set for 2026.
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