On December 19, 2024, the Brazilian Central Bank (BC) disclosed its latest inflation projections, indicating significant changes for the next few years. The recently released Quarterly Inflation Report (RTI) revealed adjustments to both the growth forecast for the country’s Gross Domestic Product (GDP) and the expected inflation rate, reflecting stronger than anticipated economic performance this year.
The BC increased its GDP growth estimate for 2024 from 3.2% to 3.5%, which, if realized, would mark the highest rate of economic expansion since 2021 when Brazil recorded 4.8% growth. The final GDP figure will be officially released on March 7, 2025. This upward revision largely stems from positive surprises during the third quarter of 2024, which showed slower than expected economic deceleration. “The revision of the GDP growth projection for 2024 reflects the positive surprise in the results of the third quarter and available indicators for the fourth quarter up to the reporting date,” stated the report.
The report highlights the services sector as the main driver of this increase, contributing 0.6 percentage points to the overall growth forecast. Despite mixed performances across sectors, the services industry's momentum compensated for declines anticipated within agriculture and industry. Specifically, the BC noted, “The increase in the forecast for the services sector was driven by positive surprises in the third-quarter results, widely disseminated among activities, and by the revision of historical series.”
Looking forward, the Central Bank predicts GDP growth will slow to 2.1% in 2025, driven by factors such as tighter fiscal policy and reduced external stimuli. “There is expectation of lower growth in 2025 due to anticipated reduced fiscal impulse, the inflection of the current monetary policy, the low degree of idleness of production factors, and the lack of strong external impulse, considering the global growth outlook for 2025 similar to 2024,” the report emphasized.
Inflation forecasts have similarly fluctuated, with the BC projecting the IPCA to reach 4.9% for 2024, up from previous projections of 4.3%. Moving to 2025, the inflation expectation is expected to decrease slightly to 4.5%, continuing down to 3.6% by 2026, against the target of 3%. The report acknowledged, “The chance of the IPCA breaching the upper limit of the target is 100% for 2024; 50% for 2025; and 26% for 2026.” This stark outlook shows the challenges facing the BC as it aims to meet inflation targets.
Further details revealed the factors contributing to this upward inflation projection, citing stronger economic activity than forecasted, depreciation of the currency, and increased inflation expectations. The BC attributed higher inflation projections to recent economic surprises and the revision of short-term projections, asserting these have offset the effects of rising real interest rates.
The report's insights indicate serious concerns about inflation control, particularly as the BC projected inflation exceeding the target range until the third quarter of 2025. The IPCA is expected to reach 5.1% by then, reflecting the pressures on the economy to maintain price stability. Previous inflation projections from September suggested more optimistic figures; hence, this shift underlines the increasing difficulty of aiming for the monetary targets set out by the BC.
Short-term inflation calculations suggest the IPCA will increase by 0.58% for December 2024, experience slight reductions of -0.08% for January 2025, and return to positive growth with 1.17% for February and 0.42% for March 2025. Consequently, the BC estimates inflation to reach 5% over the twelve-month period until March 2025.
Within the overall framework, the BC is vigilant about the influencing factors such as rising prices of industrial goods due to exchange rate depreciation alongside the relatively buoyant domestic demand. Adding to the complexity, the anticipation of high service cost inflation indicates sustained inflationary trends within the market. “The recent structure of inflationary pressures remains challenging, with core measures indicative of underlying inflation also increasing,” the report acknowledged.
This situation reflects the careful balancing act the Central Bank faces. Although the current fiscal package has not produced noteworthy impacts on market projections, analysts remain skeptical about the realities of achieving fiscal goals without additional measures. A consensus appears to be forming among economists reflecting the need for vigilance on fiscal positions, particularly with uncertain impacts from the government's fiscal measures.
Despite these upward revisions, the BC remains committed to monitoring the economy's performance and adjusting its tactics accordingly. Financial analysts stress the importance of keeping inflationary expectations grounded as Brazil navigates through varying economic challenges. The outlook for the coming years, especially with potential legislative changes and global economic conditions, will be pivotal for the nation’s economic path.
Overall, the Brazilian Central Bank's revised projections indicate heightened vigilance and acknowledge the balancing act required to maintain economic stability amid rising inflationary pressures and fluctuated growth expectations.
