The Brazilian economy is showing signs of losing momentum, reinforcing prospects for a deceleration in growth. The latest economic outlook forecasts GDP to slow to 2.2% in 2025 and a further slowdown to 1.5% in 2026. This expected moderation, down from growth seen in recent years, is attributed mainly to persistently tight monetary conditions (high interest rates), a smaller fiscal impulse from the government, and the negative impact of US tariffs. However, a tight domestic labor market and potential government stimulus ahead of the Q4 2026 elections are expected to prevent a sharper downturn.
The good news is on the inflation front: prices have eased more than expected recently and are set to decline further, paving the way for eventual monetary policy easing. Year-end inflation forecasts have been revised down to 4.8% for 2025 and a further drop to 3.7% by the end of 2026. This expected moderation is primarily driven by softer domestic demand resulting from high interest rates and a stronger Brazilian Real.The Central Bank is expected to maintain its restrictive stance, keeping the policy interest rate unchanged at 15% throughout 2025. A gradual monetary easing cycle is forecast to begin in early 2026, with the policy rate expected to converge to 11% by the end of 2026, which is still considered a restrictive level. The primary sources of risk to this outlook include a potential deterioration in relations with the US, persistent political tensions, and the threat of severe fiscal or climate shocks.
