The Brazilian financial market has downgraded its inflation expectations for 2025. According to the Focus Bulletin released on Monday (15) by the Central Bank, the IPCA (National Consumer Price Index) for Brazil will close in 2025 at a lower rate than previously expected.
Just a month ago, inflation expectations were higher, with a forecast of 4.95% for 2025.
Estimate
The forecast for 2025 remains above the inflation target set by the Central Bank (BC). The target, defined by the National Monetary Council (CMN), is 3%, with a tolerance range of 1.5 percentage points up or down. This means the lower limit is 1.5%, and the upper limit is 4.5%.
In August, Brazil recorded its first negative inflation (deflation) since August 2024, at -0.11%, according to the Brazilian Institute of Geography and Statistics (IBGE). As a result, market expectations for 2025 are now closer to the upper limit of the target, which is 4.5%.
The drop in electricity bills, which fell 4.21% in August, was the main factor contributing to this deflation, with a negative impact of 0.17 percentage points on overall inflation. The real estate sector fell 0.90%. This was the largest deflation for the month of August since the introduction of the Real Plan in 1994.
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Inflation in Food and Transport Sectors Declines
The food and beverage sector (-0.46%) declined for the third consecutive month, while the transportation sector (-0.27%) also contributed to the negative result of the IPCA. Over the past three months, food prices have fallen by -0.91%, while transport costs also decreased by -0.27%.
Exchange Rate Expectations
The financial market’s expectations for the US dollar exchange rate at the end of 2025 have also been revised downwards, from R$ 5.55 projected last week to R$ 5.50, according to the latest Focus Bulletin. This marks the fourth consecutive week of downward revisions for the dollar’s expected value. Part of this decline is attributed to the economic measures adopted by the Trump administration. For 2026 and 2027, the projected exchange rate remains at R$ 5.60.
Stable Expectations for GDP and Selic Rate
Expectations for the Gross Domestic Product (GDP) and the basic interest rate (Selic) remained stable. The market projects a 2.16% GDP growth for 2025, unchanged from last week. Four weeks ago, the projection was slightly higher at 2.21%.
For 2026, the projected GDP growth is 1.80%, down from 1.85% last week and 1.87% four weeks ago. For 2027, the expected growth rate is 1.90%, slightly higher than the 1.88% projected last week and 1.87% projected four weeks ago.
Selic Rate
Regarding the Selic rate, the projection remains at 15% for the end of this year, the same as the past 12 weeks. For the coming years, the financial market expects a rate of 12.38% in 2026 and 10.50% in 2027.
To meet the inflation target, the Central Bank primarily uses the Selic rate. Currently, the Selic is set at 15% per year by the Monetary Policy Committee (Copom). As inflation slows and the economy begins to decelerate, Copom has halted its cycle of interest rate hikes.
When Copom raises the Selic rate, the goal is to cool down demand, which impacts prices. Higher interest rates make credit more expensive and encourage saving.
Impact of Interest Rates on Economic Growth
Banks consider factors beyond the Selic rate when determining the interest rates they charge consumers, including the risk of default, profit margins, and administrative costs. Therefore, higher rates can make economic growth more difficult.
When the Selic rate is reduced, credit typically becomes cheaper, which encourages production and consumption, reduces inflationary pressure, and stimulates economic activity.
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