Itaú Unibanco Raises Selic Rate Forecast To 15.75% For 2025
Date
1/20/2025 3:19:47 PM
(MENAFN- The Rio Times) Brazil's inflationary pressures are intensifying, with major financial institutions forecasting the Selic rate-the country's benchmark interest rate-will rise to 15.75% by mid-2025.
This projection, shared by Itaú Unibanco and Apex Capital, reflects growing concerns over persistent inflation and a depreciating currency. It also highlights the challenges posed by fiscal imbalances.
The Central bank of Brazil has already raised the Selic rate to 12.25% as of December 2024 and signaled further hikes, underscoring the difficulty of achieving economic stability in a challenging global and domestic environment.
Inflation expectations have steadily worsened despite aggressive monetary tightening. The IPCA inflation index is forecast to reach 6.1% by the end of 2025, double the Central Bank's 3% target. Core inflation and services inflation remain particularly elevated at approximately 6% and 8.5%, respectively.
Economists attribute this trend to an overheated labor market and wages outpacing productivity. They also point to expansionary fiscal policies that have strained the effectiveness of monetary policy.
The sharp depreciation of the Brazilian real has further exacerbated inflationary pressures, with the exchange rate per U.S. dollar hovering above R$6. This has accelerated the pass-through effect on consumer prices, particularly for goods sensitive to currency fluctuations.
Brazil's Economic Challenges
Analysts warn that much of the real's depreciation has yet to fully impact prices, suggesting additional inflationary pressures in the months ahead. Fiscal challenges compound these issues, as Brazil grapples with a high debt-to-GDP ratio and rising financing costs.
Nearly half of Brazil's public debt is linked to the Selic rate, meaning higher rates directly increase the government's debt burden. Efforts to address fiscal imbalances have been limited. Financial markets have deemed recent budget adjustments insufficient.
This has further weakened investor confidence in Brazil's fiscal sustainability. Economic growth is also expected to slow significantly in 2025 due to tighter monetary conditions and reduced fiscal stimulus.
After growing at an estimated 3% in 2024, GDP is projected to expand by just 2% in 2025. Analysts highlight risks of a "hard landing" for the economy if inflation remains unanchored and interest rates stay elevated for an extended period.
The Central Bank faces a delicate balancing act in its efforts to combat inflation while minimizing economic disruption. However, without meaningful fiscal reforms to complement monetary policy, achieving long-term stability may prove elusive.
For investors and policymakers alike, Brazil's economic trajectory underscores the critical interplay between monetary tightening and fiscal discipline. It highlights the importance of structural reforms in addressing systemic vulnerabilities.
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