It's time for Brazil to tighten its monetary policy: Citi

Citi analysts on Brazil Copom's next moves: "We now expect an increase of 100bps in the Selic rate at a 25bps-per-meeting pace. Given i) the higher-than-target inflation forecasts, ii) the persistent deterioration in inflation expectations and the exchange rate and, iii) the mismatch between demand and supply on activity/labor fronts, an interest rate hike seems to be the most likely scenario. Joining the 20bps gap between Copom’s inflation forecasts and the target in the 1Q26 horizon (3.2% against 3.0% target), and Copom’s estimates of the required increase in the interest rate to reduce inflation by 20bps5, we believe that a 100bps hike in the Selic rate, implemented over four hikes of 25bps each at the next meetings, is the most likely outcome. As a result, we see the Selic rate at 11.25%, 11.0% and at 10.50% at 2024, 2025 and 2026 year-ends with Copom initiating a normalization process toward neutral monetary policy only in 4Q25. Lastly, all of these economic conditions suggest that the risks around the now expected tightening cycle are tilted to the upside, meaning a larger than 100bps hike in the Selic rate is more likely than a smaller increase in the interest rate."

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