BRASILIA, Jan 21 (Reuters) - Economists are revising their projections for Brazil's interest rates upwards due to worsening inflation expectations, a weaker currency, and ongoing concerns about the fiscal outlook for Latin America's largest economy.
Citi is forecasting rates to reach 15.50% by June, with similar adjustments made by Itau, XP, and Santander.
"We believe the currency depreciation is mainly due to fiscal policies, but we anticipate the Brazilian central bank to respond to the deteriorating inflation outlook," stated Citi's team in a report, with relaxation expected only in the following year.
Itau, on Monday, raised its Selic forecast to 15.75% by mid-year, up from 15%, and projected it to stay at that level until 2025.
"The tightening cycle might be prolonged if there is another round of currency depreciation or if expectations worsen, potentially delaying rate cuts in 2026," cautioned the bank.
This month, XP adjusted its Selic rate projection to 15.50% for this year, underscoring the increasing challenges as inflation expectations move further away from the 3% target.
Santander also made a similar adjustment in December, forecasting the Selic to end 2025 at 15.50%.
These revisions have been gathering momentum since late last year, after the administration of leftist President Luiz Inacio Lula da Silva revealed a fiscal control package, weakening the currency and driving interest rate futures higher.
Despite the central bank's decision in December to raise rates by 100 basis points, indicating similar hikes for the next two meetings to push rates from the current 12.25% to 14.25%, the highest level in over eight years, the deterioration continues.
Inflation stands at 4.83%, exceeding the upper limit of its 4.5% tolerance band. Economists surveyed weekly by the central bank have been steadily increasing their forecasts, now anticipating a 5.08% rise in consumer prices this year and 4.10% next year.