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BRAZIL: Itaú Sees Terminal Selic Rate At 15.75% In June

BRAZIL
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  • A weaker BRL and unanchored expectations point to the need to move further into contractionary territory. Itaú expects the Selic rate to reach 15.75% by end H1 2025, above their previous 15.00% estimate, and remain at that level until the end of the year. They see two 100bp increases in the next two meetings, followed by two 75bp hikes in May and June.
  • Tighter monetary policy should have a deeper impact on the economy from Q2 2025 onwards, although BRL dynamics and inflation expectations will be key to determine the size of the cycle. If the BRL depreciates once again and/or expectations deteriorate further, Itaú says that an extension of the cycle cannot be ruled out, as well as a postponement of rate cuts in 2026.
  • Since the December Copom meeting, 18-month inflation expectations have worsened by more than 20bp. If this continues, the BCB may not be able to slow the hiking pace in May. On the fiscal front, Itaú does not expect the primary budget target to be achieved in 2025, forecasting a 0.7% of GDP deficit. A more consistent improvement in the risk premium and domestic asset prices will only occur with the outlook for a more balanced public debt trajectory ahead, in their view.
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  • A weaker BRL and unanchored expectations point to the need to move further into contractionary territory. Itaú expects the Selic rate to reach 15.75% by end H1 2025, above their previous 15.00% estimate, and remain at that level until the end of the year. They see two 100bp increases in the next two meetings, followed by two 75bp hikes in May and June.
  • Tighter monetary policy should have a deeper impact on the economy from Q2 2025 onwards, although BRL dynamics and inflation expectations will be key to determine the size of the cycle. If the BRL depreciates once again and/or expectations deteriorate further, Itaú says that an extension of the cycle cannot be ruled out, as well as a postponement of rate cuts in 2026.
  • Since the December Copom meeting, 18-month inflation expectations have worsened by more than 20bp. If this continues, the BCB may not be able to slow the hiking pace in May. On the fiscal front, Itaú does not expect the primary budget target to be achieved in 2025, forecasting a 0.7% of GDP deficit. A more consistent improvement in the risk premium and domestic asset prices will only occur with the outlook for a more balanced public debt trajectory ahead, in their view.