Brazil 2028 inflation near target, near-term pressures persist

Brazil's central bank on Thursday released updated inflation forecasts that show price increases returning close to the official 3% target by the end of 2028. The near-term outlook deteriorated, with inflation running well above the target through 2027.

The projections reflect expectations for economic activity that has proven more resilient than the bank previously assumed. Stronger-than-expected growth keeps spare capacity tight and price pressures sticky, the bank said in its quarterly Inflation Report.

The gap between the near-term overshoot and the 2028 convergence frames the policy challenge. To bring inflation back to target, the central bank likely needs to keep the Selic rate at elevated levels for longer than markets had priced. That scenario supports the real through the carry trade, because higher real yields attract foreign capital.

The trade-off is growth. An extended tightening cycle risks slowing the economy more than the bank's own projections assume. If that happens, the real could weaken as expectations of future cuts narrow the rate differential.

The central bank also revised its GDP growth estimates higher for 2025 and 2026, reinforcing the message that demand-side pressures are not fading quickly. Markets will watch the bank's next policy statement and inflation report for any shift in guidance about the length of the current tightening cycle.

The inflation forecasts were based on a survey of economists, which the central bank uses as its benchmark. That survey has seen 2025 and 2026 estimates climb in recent weeks, adding to the case for the Selic to stay restrictive through at least the first half of 2026.