Brazil's central bank unlikely to cut rates before 2026, Itau says

Itau Unibanco economists anticipate Brazil's central bank will maintain its benchmark Selic rate at 14.75% for a prolonged period, with no room for rate cuts until 2025 due to persistent inflation concerns; the risk is tilted towards further delays beyond Q1 2025. The recent hike in the financial transactions tax (IOF) by President Lula's government is seen as equivalent to a 25 basis point monetary tightening, while new payroll loan rules could boost Brazil's GDP by up to 0.6 percentage points over a year. Itau forecasts Brazil’s GDP will grow 2.2% in 2025, slowing from 3.4% last year.

Analysis

Economists at Itau Unibanco project that Brazil's central bank will maintain the benchmark Selic rate at its near two-decade high of 14.75% throughout 2024, with potential rate cuts not anticipated until 2025 and a notable risk of these being deferred from the first to the second quarter. This cautious monetary policy stance, following a recent 50 basis point hike and the removal of forward guidance, aims to anchor inflation expectations at the official 3% target. Compounding this restrictive environment, the recently announced hike in the financial transactions tax (IOF) on corporate credit, private pensions, and foreign exchange transactions is estimated by Itau to be equivalent to an additional 25 basis points of monetary tightening, despite a subsequent 2 billion reais reduction in its expected revenue generation from the initial 20.5 billion reais. While new rules for payroll-deductible loans could provide a modest GDP uplift of up to 0.6 percentage points over a year, Itau forecasts a deceleration in Brazil's GDP growth to 2.2% in 2025, down from 3.4% last year, reflecting a more challenging economic landscape.

Key Decisions for Investors

• Investors should anticipate a prolonged period of high interest rates in Brazil, potentially impacting fixed-income valuations and increasing the cost of capital for Brazilian equities.
• The forecasted slowdown in Brazilian GDP growth to 2.2% in 2025, combined with the de facto monetary tightening from the IOF tax hike, suggests a cautious stance on investments heavily exposed to Brazilian domestic consumption and corporate credit.
• Closely monitor Brazil's inflation data and central bank communications for any shifts in the timeline for monetary easing, as further delays in rate cuts could extend headwinds for growth-sensitive assets and potentially signal deeper economic challenges.