Our economic outlook for Brazil

Geopolitical developments and AI are shaping the global backdrop for Brazil, while fiscal policy remains the key domestic risk. Geopolitical effects are more immediate, reflecting recently announced U.S. tariffs on some Brazilian goods and higher energy prices. Over time, Brazil could benefit from AI-related investment through its clean energy base, geopolitical position, and role as a major producer of copper and iron ore. Domestically, elevated public debt and uncertainty ahead of the October 2026 general election remain important risks to the outlook.

Near-term data continue to point to an expanding economy. Consumption growth has accelerated, supported by a tight labor market and fiscal stimulus. Net exports have also contributed positively to recent quarters. We do not expect the recently announced U.S. tariffs to materially affect the outlook because exports to the U.S. represent a small share of Brazil’s GDP and several categories are exempt. Investment, however, has fallen materially from its 2024 highs. We expect growth to moderate over the forecast horizon as the fiscal impulse fades.

Inflation has declined from last year’s peak of 5.5%, but the disinflation process remains incomplete. Headline inflation stands at 4.6%, above the 3% target set by the Central Bank of Brazil (BCB), while services inflation remains elevated. Medium-term inflation expectations have fluctuated within the BCB’s tolerance interval but have not settled at the 3% target, offering limited support for further disinflation. Energy price volatility and a tight labor market should keep inflation persistent, leading to only a gradual return to target.

Monetary policy remains highly restrictive despite the recent start of a cautious easing cycle. The Selic rate remains well above most estimates of neutral and should continue to cool credit and demand over time. Although inflation has recently improved, the persistence of medium-term expectations above the 3% target supports a cautious approach to further rate cuts. The BCB reduced the Selic rate by one quarter-point to 14% on August 5, and we expect no further rate cuts in 2026. We anticipate further easing next year once there is greater clarity to the fiscal outlook.

Thor Solanes also contributed to this outlook.