Brazil analysts raised their estimates for the benchmark interest rate after President-elect Luiz Inácio Lula da Silva got approval for a $32 billion spending plan.
The benchmark Selic rate will end next year at 12%, up from a prior estimate of 11.75%, according to a weekly central bank survey published on Monday. Annual inflation will hit 5.23% by end-2023, further above the monetary authority's 3.25% target for that year.
Annual inflation eased to 5.9% by mid-December, the lowest since early 2021, with core measures that strip out the most volatile items improving and prices of services rising below estimates. Yet transportation costs rose as the impact of recent tax cuts on fuel continue to fade.
Policymakers led by Roberto Campos Neto are "closely" monitoring Lula's plans to introduce a new fiscal anchor needed to keep public debt under control in the longer term. They've warned that a reversal of the labor reform or an increase in subsidized public credit can "reduce the power" of their aggressive tightening cycle that lifted interest rates to 13.75% in over a year.
Many economists are delaying their estimates for the beginning of the easing cycle, with firms including Credit Suisse and XP betting there won't be rate cuts next year. Analysts surveyed by the central bank now see a 25-basis-points cut in August, down from a prior 50 basis-point forecast.
Last week, congress approved an expansion of the spending ceiling and additional resources for investment totaling 168 billion reais ($33 billion) for 2023. The bill will finance a boost in paychecks to the poor, a higher minimum wage and salary raises to public servants, key campaign pledges by Lula.
Analysts continued to revise up their inflation estimates in the medium term. They now see consumer price increases at 3.6% in 2024 and 3.2% in 2025. The monetary authority's goal is 3% for both years.
WASHINGTON POST