Brazil’s central bank says inflation still driven by demand despite rate hikes

Brazil’s central bank said in its latest survey that inflation remains predominantly driven by demand-side factors, even as interest rate hikes take an increasing toll on economic activity.

The findings, published in the central bank’s weekly Focus survey of economists, indicate that while monetary policy has contributed to moderating price growth, underlying demand conditions continue to exert upward pressure on inflation. The survey, conducted among analysts and market participants, reflects expectations that inflationary pressures will persist in the near term.

The central bank has raised its benchmark Selic rate by 450 basis points since March 2021, bringing it to 10.75% in an effort to tame inflation running above the target range. Despite these measures, inflation remains elevated, with consumer prices rising 4.65% in the 12 months through February, according to official data. The central bank’s target for 2024 is 3.0% with a tolerance margin of 1.5 percentage points.

Analysts participating in the Focus survey project inflation to average 3.89% in 2024, down from 4.56% in the prior week’s estimate but still above the central bank’s target. The survey also trimmed GDP growth forecasts to 1.90% from 1.93%, reflecting concerns over the impact of higher borrowing costs on economic activity.

The central bank’s assessment underscores the challenge of balancing inflation control with growth preservation, as policymakers navigate a complex macroeconomic environment. The persistence of demand-driven inflation suggests that further rate hikes may be required to align price growth with the bank’s target.