Brazil: Central Bank’s Battle for Inflation Expectations can’t still be won

The market’s inflation forecast for 2024 has fallen from 3.9% to 3.76%, among those who reported their projections to the Focus bulletin in the last 30 days. The median of analysts who renewed their projections in the last 5 business days of last week is already lower, at 3.7%. In other words, the Central Bank will start from a more favorable position to lower inflation in 2025.

Another fact that should have led the market to revise downward inflation projections for 2025 is that the Central Bank, increasingly, has been focusing on monetary policy this year.

The market may even think that, in the long term, it will be difficult to keep inflation on target due to uncertainties about the Lula government’s commitment to fiscal adjustment or doubts about the credentials of who will replace the current head of the Central Bank, Roberto Campos Neto, starting next year. But inflation for 2025 is being fought right now, and the current efforts of the Central Bank should influence the market’s projections more.

The curious thing is that, at the same time, the market projects deeper interest rate cuts than those signaled in the Central Bank’s inflation projections.

In its latest minutes, the Brazilian Copom stated that if the interest rate falls to 9% per year by the end of 2024, as predicted by the market, inflation will be 3.2% next year, which is above the target. This means that, in the scenario outlined by the Copom in January, the interest rate would have to be above 9% per year by the end of 2024 to ensure compliance with the 2025 target.

However, the distribution of market expectations shows that only 30.6% of analysts expect the Central Bank to be as strict as indicated in the inflation projections, leaving the Selic rate in the range between 9.25% and 9.75%.