Brazil’s Central Bank Cuts Growth Outlook on Inflation Woes

(Bloomberg) -- Brazil’s central bank lowered its economic growth forecast for this year, signaling further interest rate hikes will weigh on activity as policymakers fight inflation that’s speeding up further above target.

The bank expects gross domestic product to expand 1.9% this year, down from the previous of estimate of 2.1%, according to its monetary policy report published Thursday. By comparison, analysts surveyed by the monetary authority see 1.98% growth in 2025.

A separate report the same day showed annual inflation speeding up further above the 3% target in early March, pressured by soaring food prices that are grinding away support for President Luiz Inacio Lula da Silva and sapping purchasing power.

Official data showed consumer prices increased 0.64% on the month, just under the 0.7% median forecast from analysts in a Bloomberg survey. From a year ago, they climbed 5.26%, reaching their highest level since March 2023. 

Sticky inflation and consumer demand are proving to be a stern test for central bankers as they move to cool Latin America’s largest economy. Last week, they hiked the benchmark Selic by a full percentage point to 14.25% and signaled another, albeit smaller rise is on the way at their next decision in May.

Swap rates on the contract due in January 2026, an indicator of the market outlook toward monetary policy at the end of this year, fell seven basis points in morning trading as traders reacted to the lower central bank growth forecast and smaller-than-expected increase in consumer prices.

The inflation figures “came a bit better than expected, but still showing an acceleration,” said Marco Oviedo, a strategist at XP Investimentos. “It confirms the current monetary policy outlook of continued tightening but at a softer pace.”

All of the groups of goods and services monitored by the statistics agency became more expensive in the first two weeks of March. Food and beverage prices jumped 1.09% and transportation costs gained 0.92% due to costlier fuel and bus fares.

A spate of bad weather and generous government spending are fanning food price hikes which are enraging consumers and making the work of central bank chief Gabriel Galipolo even harder. Policymakers are expected to pause their tightening cycle sometime this year, but they are being bedeviled by rising inflation forecasts and uneven growth.

In lowering their economic growth estimate, central bankers pointed to the toll double-digit borrowing costs will take on activity as policymakers work to haul inflation down to their goal. They also expect a drag from slower global growth, as well as a weaker push from domestic fiscal policy.

Meanwhile, Lula is moving to ease the pinch of the high cost of living as his popularity sags to the lowest level of any point during his terms in office. His administration has loosened rules for early withdrawals from the workers’ severance fund, known as FGTS, and proposed more tax exemptions for the poor, among other measures.

--With assistance from Giovanna Serafim and Leda Alvim.

(Updates with inflation data starting in third paragraph)

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