By Marcela Ayres
BRASILIA, Nov 5 (Reuters) – The Brazilian central bank’s decision to halt a run of interest rate cuts after the reelection of President Luiz Inacio Lula da Silva has prompted some economists to bet on borrowing costs staying at the current elevated level until as late as 2028.
The country’s central bank on Wednesday held its benchmark interest rate at 13.75%, one of the highest real rates in the world, as it raised its inflation forecast amid uncertainties on how Lula will tackle stretched public finances as well as the Iran war’s impact on energy prices.
Those concerns outweighed signs of a sharper-than-expected economic slowdown in Latin America’s largest economy.
Following the central bank’s decision, Goldman Sachs forecast that rates will stay unchanged until at least the second quarter of 2028. Other analysts predict no change before the end of 2027.
“We see room for only limited cuts in 2028 although considerable uncertainty over the growth and policy outlook (fiscal in particular) makes the scope for easing, if any at all, difficult to assess,” Alberto Ramos, a Goldman Sachs economist, wrote in a note.
LULA VICTORY PROMPTS OUTLOOK RETHINK
Lula’s surprise victory over right-wing challenger Flavio Bolsonaro in an October 25 presidential runoff election has sparked a sharp weakening of the real and a surge in long-term borrowing costs.
It also highlighted the scale of concerns over inflation and fiscal policy, with the leftist president yet to name his next finance minister or say how he will repair public finances after promising more social spending during his election campaign.
Rapidly rising mandatory spending has fueled fiscal concerns and pushed investors to demand higher risk premiums to buy Brazilian government debt. Pressured by this dynamic, Brazil’s gross debt rose by more than 10 percentage points during Lula’s current presidential term, to 82.9% of gross domestic product.
Analysts at investment platform XP and Itau, a Brazilian bank, expect rates to remain at their current level throughout 2027.
Diogo Guillen, Itau’s chief economist, who until last year was the central bank’s economic policy director, said the rate-cut pause announced by Copom, the central bank’s monetary policy committee, reflected a sharp reassessment of Brazil’s macroeconomic outlook.
Before the election runoff, investors expected Brazil’s central bank to continue the run of rate cuts it began in March.
Brazil’s yield curve now implies 25-basis-point hikes at each of the first three monetary policy meetings next year.
Last week, Itau slashed its 2027 GDP growth forecast to 0.5% from 1.2%, citing tighter financial conditions, while raising its inflation projection to 6.1% from 4.6%. The central bank has an official 3% inflation target.
Noting that the central bank’s policy statement on Wednesday described monetary policy as already “substantially contractionary,” Citi said policymakers appear to see no immediate need to begin a tightening cycle despite market pricing showing rate increases in the coming year.
Some analysts said the outlook could change once again if Lula, who has said he is committed to fiscal discipline, offers details on his fiscal policy approach.
“Conditional on the strengthening of fiscal fundamentals, we still see room for Copom to resume a gradual interest rate cutting cycle in the second half of 2027, although we recognize that this outlook is highly dependent on the re-anchoring process of inflation expectations in the coming months,” Citi said in a report.
The central bank raised its inflation forecast for the relevant 18-month horizon to 3.5%, from 3.1% in September, citing recent supply shocks and the rate path embedded in its weekly Focus survey of economists.
That survey, based on data collected last Friday, already showed higher inflation and weaker growth expectations, but it still pointed to further cuts to borrowing costs, with the central bank’s benchmark Selic rate ending next year at 12.5%.
Luis Felipe Vital, head of macro strategy at Warren Investimentos, said future Focus surveys are likely to reflect more forecasts for an extended hold in borrowing costs, as many economists were still revising their projections after Lula’s reelection and before the latest central bank decision.
“The scenario is no longer compatible with interest rate cuts,” he said.
(Reporting by Marcela Ayres; Editing by Paul Simao)
