After recent communications from the Central Bank, we revised our terminal Selic expectation from 15.5% to 15% – 03/28
Although the inflation model used by the Central Bank suggests a higher Selic rate to anchor expectations, the committee’s signals indicate the approach of the end of the monetary tightening cycle. While it indicated that the adverse inflation scenario does not allow for an immediate end to the tightening cycle, the committee emphasized the lagged effect of monetary policy and uncertainty about the evolution of economic indicators. This suggests only one additional rate hike of smaller magnitude at the May meeting. Additionally, in the Monetary Policy Report press conference, President Gabriel Galípolo underscored the need for convergence to the inflation target while highlighting that the current interest rate level is already contractionary—justifying a slower pace of hikes.
Given these signals, we believe the terminal rate of the tightening cycle will be lower than previously projected. Thus, we revised our Selic expectation from 15.50% to 15% in 2025, with one more 50bps hike in May and a 25bps hike in June. For 2026, we adjusted our forecast from 11.75% to 13.00%, with rate cuts beginning only in the second quarter of the year.
Incorporating the new Selic scenario, we now expect the IPCA to close the year at 5.4% (previously 5.2%), slowing to 4.6% in 2026 (previously 4.4%). The revision reflects a higher inflation forecast, particularly for services, also explained by the still-resilient labor market. Regarding economic activity, we expect 1.9% GDP growth in 2025 (previously 1.8%), incorporating an improvement in monetary cycle-sensitive metrics given the lower-than-previously-projected interest rate level. On the fiscal front, the scenario remains challenging, with Gross debt is expected to reach 80% of GDP in 2025 and trending higher to 84.4% in 2026, reflecting challenges in balancing public accounts.
In the U.S., Core PCE surprises to the upside amid import tariff increases. Core PCE accelerated significantly, with durable goods inflation potentially reflecting the first effects of tariffs on Chinese imports. This week, President Donald Trump signed a proclamation imposing a 25% tariff on automobile imports, set to take effect on April 3. On April 2, the announcement of reciprocal tariffs for all countries is expected, though details of the government’s broader plan remain unclear.
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