Since March 2021, the Brazilian Central Bank (BCB) has aggressively hiked the benchmark interest rate (Selic) from 2% to 13.75% in August 2022. This led to a slowdown of domestic demand and increased debt servicing costs for consumers and businesses. According to Santander (Santander Economic Research – Brazil) estimates, total new corporate financing in January – May 2023 shrunk by 19.3% (inflation adjusted).
On 21st of June, policymakers held the key rate steady for the seventh time at 13.75%. Brazil’s central bank said it may be able to start cutting interest rates in August. The outlook improves as annual inflation eases closer to target.
Atradius projects Brazil’s GDP growth to slow from 3.0% in 2022 to 2.5% in 2023 and to moderate further to 0.4% in 2024.
The cause of the projected slowdown is due to the lagging effects of high domestic interest rates, lower external demand and policy uncertainty stemming from the change in government at the start of 2023. This suggests inflation will remain high and will delay the start of the monetary policy easing cycle (which Atradius expects in the last quarter of 2023).
Allianz Trade expects BCB to cut the interest rate in the second half of 2023. According to AU Group the cuts could be up to 50 basis points. However, Santander (Brazil Economic Activity June 2023), draws attention to the stronger than expected inflationary resilience as a downside risk. This might lead the BCB to keep a tight policy stance for even longer and might result greater than expected activity slowdown.