Mind the gap

BRAZIL ECONOMICS - Report 29 Sep 2025 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

The Central Bank maintained its inflation projection for the relevant horizon, despite exchange rate appreciation and the slowdown in economic activity. One factor behind this decision was the upward revision of output gap estimates, reflecting the stronger-than-expected labor market dynamics. The Central Bank’s recurring surprise with a tighter output gap than initially anticipated repeats the pattern observed in recent years.

Although the latest revision of the output gap moves in the right direction, we assess that the risks of stronger demand than the Central Bank expects remain high, in response to fiscal stimuli, and of a lower potential growth rate than currently assumed by the Central Bank.

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