A coy central bank in the face of inflation?

BRAZIL ECONOMICS - Report 03 Feb 2025 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

Recent data suggests an unfavorable inflationary trend, marked by the acceleration of its underlying measures. Our forecast points to an inflation rate of 5.8% in 2025, above the level recorded in 2024 and, therefore, also above the tolerance limit for the inflation target. We use our semi-structural model to predict inflation within the relevant monetary policy horizon, suggesting it will reach 4.8% in the third quarter of 2026. Our model also predicts an economic activity slowdown consistent with the reduction in inflation in 2026, but it does not consider a possible reaction from the administration to a lower expansion rate. At the same time, however, it seems likely that the government will act to mitigate the economic slowdown required to reduce inflationary pressures. Thus, we expect actual inflation to exceed the level indicated by the model.

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