Brazil central bank raises long-term inflation forecasts, sees challenging path to target

BRASILIA (Reuters) - Brazil's central bank raised its inflation projections on Thursday for the long-term despite anticipating weaker economic activity this year, and said that this scenario makes reaching its 3% target challenging.

After forecasting inflation at 5.1% for 2025 last week when it lifted interest rates by 100 basis points and signaled a smaller hike at its next policy meeting, the bank now projected inflation at 3.7% in 2026 and 3.1% in the third quarter of 2027, the final period covered by its latest estimates.

The data, released in the bank's quarterly monetary policy report, effectively show inflation remaining above target throughout the entire forecast horizon, only nearing the 3% goal more than two years ahead.

Compared with the previous report in December, inflation expectations rose by 0.6 percentage points for this year and 0.1 percentage points for 2026.

The forecast for the third quarter of 2026, considered the most influenced by current monetary policy decisions, also increased by 0.1 percentage points to 3.9%.

"Inflation projections remained above target, making convergence to the goal challenging," policymakers said.

"The effects of rising inflation expectations, inertia from recent inflation surprises, and upward revisions to short-term projections pushed estimates higher, while the increase in real interest rates, exchange rate appreciation, and lower oil prices contributed to downward pressures," they added.

The deterioration in inflation forecasts came even as the central bank revised its economic growth outlook lower, now expecting Latin America's largest economy to expand by 1.9% this year, down from 2.1% in December.

It attributed the revision to "a more contractionary monetary policy, weaker fiscal impulse, reduced slack in production factors, and moderating global growth."

(Reporting by Marcela Ayres)