The path of disinflation: between desire and reality

BRAZIL ECONOMICS - Report 17 Mar 2025 by Alexandre Schwartsman, Cristina Pinotti and Diego Brandao

The Central Bank has signaled its understanding that the economy needs to slow down for inflation to converge to the target. In this report, we attempt to estimate the growth rate that aligns with the Central Bank’s scenario, particularly the path that moves from a positive output gap of 0.7% at the end of 2024 to a negative gap of -0.6% of by mid-next year. Our calculations indicate such growth rate at approximately 2.1% per year. Focus consensus forecast for growth are close to this value and still seem to be within a range that would not cause the Central Bank to change its plans.

In the event of a greater-than-expected slowdown, however, the Copom may reconsider the degree of monetary tightening, meaning the Selic rate could reach 15% per year. That said, as we hold a less optimistic view than the Central Bank regarding both the current output gap and potential growth rate, we believe that a change in stance would lead to an inflation trajectory worse than projected by the Committee.

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