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Projected Brazil interest rate in 5 years: Selic near peak for now but hawkish bank won’t rule out future rises

By Mensholong Lepcha

Edited by Jekaterina Drozdovica

16:50, 27 September 2022

Central Bank of Brazil headquarters in Brasilia.
Brazil’s central bank has carried out 12 rate hikes since March 2021. – Photo: Shutterstock; Arnaldo Jr

Brazil’s central bank has arguably been the world’s most hawkish central bank over the last 18 months, having carried out 12 rate hikes since March 2021.

With inflation persistently above the Brazilian central bank’s target, interest rates are expected to stay elevated for the near term.

What about the projected Brazil interest rate in 5 years? In this article, you will come across important factors to look at when evaluating the long-term forecast for Brazil interest rates 

What is the Banco Central do Brasil (BCB)?

The Banco Central do Brasil (BCB) is Brazil’s central bank. The BCB was created in 1964 by the Conselho Monetário Nacional (CMN) (National Monetary Council), the country’s highest macroeconomic and financial regulatory authority. 

The BCB functions as a monetary, regulatory and supervisory authority, in accordance with guidelines issued by the CMN.

The governor of the central bank is one of the three members who make up the CMN alongside Brazil’s minister of finance and the minister of planning, development and management.

The BCB follows an inflation-targeting monetary regime. An inflation target of 3.5% has been selected for 2022, with a tolerance band of 2% to 5%.

The Brazilian central bank uses the Selic interest rate as its main monetary policy tool. The BCB’s monetary policy committee, known as the ‘Copom’, meets every 45 days, or eight times a year, to set the target for the Selic rate.

Brazil’s interest rate history: Plano Real

An inflation-targeting monetary policy was only implemented in Brazil in 1999 as a part of structural and institutional reforms in search for long-term price stability.

In the late 1980s and the early 1990s, Brazil suffered periods of hyperinflation. According to the BCB, annual inflation in Brazil came in at nearly 5,000% in June 1994.

A disinflation plan called the ‘Plano Real’ (‘Real Plan) was implemented in mid-1993. A new currency called the Brazilian Real was introduced in 1994, and an inflation-targeting monetary policy was adopted in 1999. 

According to the BCB’s Brazil interest rate history data, the Selic rate stood at 7.5% a decade ago. After falling to 7.25% by the end of 2012, Brazil saw rate hikes that took Selic rates to a high of 14.25%.

Brazil saw a series of rate cuts between October 2016 and August 2021, and Brazil interest rates dropped from 14.25% to 2%. After about seven months of Brazil interest rates holding steady at 2%, the BCB began hiking selic rates from late-March 2021.

The BCB has been arguably the world’s most hawkish central bank over the past 18 months. Between March 2021 and September 2022, the BCB has conducted 12 rate hikes, taking Selic rates from 2% to 13.75%, as of 27 September 2022.

Inflation as the main driver of the Selic rate

Inflation is the most influential factor when it comes to central banks that follow an inflation-targeting monetary policy. Over the next five years, observers can compare inflation targets set by the Brazilian central bank and the actual inflation data reported for clues on the future of Selic rates in the country.

As mentioned earlier, the BCB uses Selic rates, which are short-term Brazil interest rates, as its primary tool to maintain price stability. If annual inflation comes in above the target range over a sustained period of time, the BCB could use hike rates to reduce the supply of money in the economy. 

Lower money circulation among consumers can lead to lower consumer demand. Lower demand has a disinflationary effect and can lead to a fall in prices, if supply constraints are not present at the time.

We have seen an extraordinary economic scenario play out in the post-pandemic era. As the world went into a lockdown due to Covid-19 restrictions, industrial centres across the world came to a standstill. 

Even when restrictions eased, frequent virus waves caused resumption of factory activities to take place in a stop-start manner. Supply chains were further disrupted due to cargo shortages and port closures.

As vaccination rates rose and the economies opened up, pent-up demand and supply constraints resulted in the price of goods to rise. Low interest rates, stimulus checks and historically low unemployment across major economies added to the supply-demand imbalance.

The start of the Russia-Ukraine war brought in energy supply problems as Western economies enforced economic sanctions on Russia, the world’s third largest oil producer, according to the International Energy Agency (IEA). 

As a result, many countries including the US, UK, EU, Australia and Brazil saw multi-decade high inflation in 2022.

Annual inflation rate in Brazil has persistently remained above the BCB’s inflation tolerance range of 2% to 5% in 2022. The central bank has stepped in by hiking rates four times in 2022, as of 27 September 2022.


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Going forward, the BCB is expected to react similarly if price pressures remain stubbornly high. As of September 2022, the BCB has set an inflation target of 3.25% for 2023, with a tolerance range of 1.75% to 4.75%.

The Brazilian central bank’s inflation-targeting monetary policy aims to keep inflation at a target of 3% and at a tolerance range of 1.75% in 2024 and 4.75% in 2025.

Research firm Fitch Ratings saw inflation rate in Brazil declining to 6.5% by the end of 2022, and trending at 5.2% in 2023 and 3.5% in 2024. 

Interest rate differentials

The difference in interest rates between economies can affect the foreign exchange (FX) rate of their currencies. In 2022, the US dollar surged against nearly all other currencies on the back of an aggressive rate hike cycle implemented by the US Federal Reserve (Fed). 

The US dollar index (DXY), which tracks the performance of the greenback against a basket of major world currencies, has gained nearly 20% to an over 20-year high.

The Brazilian Real has suffered against the US dollar, dropping over 25% year to date, as of 27 September. 

Over the next five years, if leading economies like the US start a rate hike cycle, nations like Brazil could be forced to keep up to prevent their currencies from depreciating. 

If the Brazilian Real falls against the US dollar, the nation will incur higher costs on imports, while a stronger dollar will increase the value of its exports.

Economic think tank ING’s longer-term USD/BRL forecast indicated that the pair could end the year at 5.70 and move to 6.00 by the end of 2023.

“Higher US rates have sent the dollar higher across the board, including against Latam currencies. A few points to make here.The higher levels of FX volatility we see are bad for the carry trade.  While the 12.7% per annum implied yields on Brazil 3m NDFs are undoubtedly attractive, higher volatility could well see the Brazilian real pressured further. There are very close and contentious Presidential elections due early next month and USD/BRL could easily trade back up to 5.45,” Chris Turner of ING said on 14 September.

Economic growth 

The BCB can also choose to alter interest rates in accordance with economic growth goals. If the BCB chooses to prioritise economic growth, it can lower interest rates to boost lending and consumption within the Brazilian economy. 

On the flip side, if the central bank sees the economy becoming overheated and fears inflationary pressure, it may embark on a rate hike cycle, similar to the one the world is experiencing in 2022.

Keen market observers can find clues about the BCB’s economic growth outlook in published monthly, quarterly and annual reports. 

According to the International Monetary Fund's (IMF) World Economic Outlook report, Brazil's GDP growth is expected to slow down from 4.6% achieved in 2021 to 1.7% forecasted for 2022. The IMF saw the Brazilian economy slowing down at a GDP growth rate of 1.1% in 2023.

Brazil interest rate forecast for 2022 and beyond

The Organisation for Economic Co-operation and Development (OECD) said its model-based analysis and statistical indicators forecast short-term Brazil interest rates to come in at 11.5% in the first quarter of 2023.

OECD forecasts showed that Brazil interest rates were expected to fall to 9.3% by the end of 2023. While the OECD did not give rate forecasts over the next five years, OECD data showed long-term interest rates in Brazil stood at about 7%, as of September 2022.

The OECD said long-term interest rates refer to government bonds maturing in ten years.

Elsewhere, Brazil interest rate forecast from data firm Trading Economics saw long-term Brazil selic rates trending around 11.25% in 2023 and 8% in 2024, according to their econometric models.

Finally, according to the Focus Survey, analysts expected the Selic rate to average 13.75% in 2022. Brazil interest rates were forecast to drop gradually to 11% in 2023, 8% in 2024 and 7.5% in 2024. 

Projected Brazil interest rate in 5 years: Final thoughts

It is important to note that Brazil interest rate forecasts from analysts can turn out to be wrong. The global economic environment is never stagnant and conditions that prompt central banks to hike or cut interest rates today can change quickly.

Market participants should focus on learning why a central bank may implement a certain monetary policy to better understand central bank policies. 

Forecasts shouldn’t be used as a substitute for your own research. Always conduct your own due diligence. Note that your decision to trade should depend on your risk tolerance, expertise in the market, portfolio size and goals. And never trade money that you cannot afford to lose.


What's the interest rate in Brazil?

The BCB has been arguably the most hawkish central bank in the world over the past 18 months. Between March 2021 and September 2022, the BCB has conducted 12 rate hikes, taking Selic rates from 2% to 13.75%, as of 27 September 2022.

Why is Brazil's interest rate so high?

The Brazilian central bank follows an inflation-targeting monetary policy, which has set an inflation tolerance range of 2% to 5% for 2022. However, the inflation rate has consistently come in above the BCB’s target in 2022, prompting the central bank to hike rates to 13.75%, as of 27 September 2022.

Are interest rates going to rise in Brazil?

Interest rate forecasts can depend on annual inflation rates, economic growth forecasts and interest differentials, among other factors. According to the Focus Survey, analysts expected the Selic rate to average 13.75% in 2022. Brazil interest rates were forecast to drop gradually to 11% in 2023, 8% in 2024 and 7.5% in 2024. Note that analyst predictions can be wrong. And never trade money that you cannot afford to lose.

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