Brazil’s central bank warns tight policy will slow growth

Brazil’s central bank warned on Wednesday that its prolonged period of tight monetary policy will weigh on economic activity, citing reduced domestic demand and lower investment as key transmission channels.

In its quarterly Inflation Report, the bank noted that elevated borrowing costs—maintained to bring inflation toward target—are already cooling credit growth and household spending. The assessment aligns with recent data showing a slowdown in retail sales and industrial output, which the bank attributed to the lagged effects of policy tightening.

The central bank’s baseline scenario projects slower GDP growth in 2025 compared with previous estimates, though it did not provide a revised figure. Policymakers emphasized that the stance remains necessary to ensure inflation converges to the 3.0% target by 2026, even as growth risks rise.

Analysts polled by Reuters expect Brazil’s economy to expand by 2.1% this year, down from a prior estimate of 2.3%, reflecting concerns over persistent policy restraint. The bank’s tone suggests it will maintain higher interest rates for longer, despite mounting pressure to ease amid signs of cooling price pressures.

The report also highlighted external risks, including geopolitical tensions and volatile global commodity prices, which could further complicate the inflation outlook.