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BRAZIL: Santander Sees Selic Rate Peaking At 13.00% Next Year

BRAZIL
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  • Santander notes that Brazil’s primary result forecast for this year has improved, but to meet the fiscal framework in the coming years and reduce the domestic risk premium, the country must implement additional expenditure control measures. They anticipate that at least BRL 15bn will take effect in 2025, while the final approval of the budget is awaited.
  • Economic activity is firm, but doubts remain. Santander maintain their 3.0% GDP growth forecast for 2024 and raise their 2025 estimate by 30bp, to 1.8%, due to the prospect of another good grain harvest. However, they acknowledge that 2025 may begin with coordinated contractionary impulses on the fiscal and monetary sides, which would be highly unusual.
  • These factors help to offset the inflationary effects of a higher USDBRL (5.70 - 5.80), a narrower employment gap, and the recent supply shocks. Santander see IPCA inflation at 4.8% this year and 4.3% next. Given rising inflation expectations and uncertainty, they expect the Selic rate to peak at 13.00% next year, before ending 2025 at 12.00% (vs. 10.50% previously). The persistent unanchoring of CPI expectations could justify a more frontloaded approach, but the current gradualism seems a reasonable course of action considering the prevailing economic conditions.
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  • Santander notes that Brazil’s primary result forecast for this year has improved, but to meet the fiscal framework in the coming years and reduce the domestic risk premium, the country must implement additional expenditure control measures. They anticipate that at least BRL 15bn will take effect in 2025, while the final approval of the budget is awaited.
  • Economic activity is firm, but doubts remain. Santander maintain their 3.0% GDP growth forecast for 2024 and raise their 2025 estimate by 30bp, to 1.8%, due to the prospect of another good grain harvest. However, they acknowledge that 2025 may begin with coordinated contractionary impulses on the fiscal and monetary sides, which would be highly unusual.
  • These factors help to offset the inflationary effects of a higher USDBRL (5.70 - 5.80), a narrower employment gap, and the recent supply shocks. Santander see IPCA inflation at 4.8% this year and 4.3% next. Given rising inflation expectations and uncertainty, they expect the Selic rate to peak at 13.00% next year, before ending 2025 at 12.00% (vs. 10.50% previously). The persistent unanchoring of CPI expectations could justify a more frontloaded approach, but the current gradualism seems a reasonable course of action considering the prevailing economic conditions.