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Brazil's Central Bank Likely to Step Up Tightening Pace But Still Short of Market's Views, Says SocGen

The Brazilian market is under growing pressure as investors await critical spending cut measures, which are expected to shed light on the Brazilian government’s commitment to mitigating fiscal risks sooner rather than later, according to Societe Generale.

Bloomberg’s projections now indicate that market expectations for Brazil’s central bank (BCB) policy rate hikes have surged, predicting an increase of 312 basis points in the Selic rate over the next year. This contrasts with economists’ forecasts, which anticipate the Selic rate to peak at 12.0% in the first quarter of 2025 before easing into rate cuts in the second half of 2025, as detailed in a client note by Societe Generale.

Ahead of the November policy meeting, Societe Generale anticipates that the BCB will accelerate its rate hike to 50 basis points, raising the Selic rate to 11.25%, aligning with the general consensus among economists. However, market expectations may push for a larger hike in the range of 75 to 100 basis points.

The divergence between the bank’s outlook and market sentiment stems from the belief that excessively high rates could jeopardize Brazil's public debt stability. Societe Generale underscores the urgency for the government to implement fiscal reforms to avert long-term economic strain.

In the short term, the central bank might continue to withstand market pressures, but ultimately, the responsibility lies with the government to enact necessary fiscal policies, the bank noted.