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The Central Bank not only raised the interest rate by 1 percentage point—against a majority, albeit not unanimous, expectation among analysts of a 0.75 percentage point hike—but also committed itself to two additional hikes of the same magnitude in upcoming Copom meetings. This decision was made in response to the sharp deterioration in future inflation outlook, which would bring the Selic rate target to 14.25% per year by March 2025.
At the same time, the Committee refrained from committing to the total magnitude of the monetary adjustment in this tightening cycle.
This was not our forecast. We expected a more moderate increase in the benchmark rate and did not anticipate that the Committee would go so far as to commit to two similar moves. Ultimately, what seems to have driven the Central Bank to adopt a much tougher stance was a sharper-than-expected deterioration in inflation projections, particularly for the relevant horizon (the 12 months ending June 2026), which rose from 3.6% to 4.0%, even in the context of a more contractionary Selic path than that anticipated in the November meeting.
We believe the surprise in this case stems from an upward revision of the output gap. In our projection of the Central Bank’s forecast, we accounted for the effect of a more depreciated exchange rate and worsening expectations (which would have raised the Central Bank's forecast), as well as the upward shift in the Selic trajectory. However, we did not factor in the effects of a reassessment of the economy’s slack.
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