The Battle of Expectations

BRAZIL ECONOMICS - Report 09 Dec 2024 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

Since the last Copom meeting, the inflationary outlook has worsened due to deteriorating inflation expectations, currency depreciation, and the persistence of strong economic activity and labor market, stressing the output gap. As a result, BCB’s inflation forecast for the relevant monetary policy horizon is expected to increase by approximately 0.1 percentage points, according to our calculations based on the Central Bank's model. In this context, we believe there is a high probability that BCB will raise the Selic rate by 0.75 percentage points at its next meeting. If this scenario materializes, we expect a similar increase in January to avoid further loss of credibility for the Central Bank, which could manifest in new rounds of rising inflation expectations. The need for similar moves in December 2024 and January 2025 reduces the chances of a 1 percentage point hike at this meeting.

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