Brazil Rate and Inflation Bets Soar After Lula’s Reelection

Brazil economists raised their interest rate and inflation forecasts through 2029 after President Luiz Inácio Lula da Silva’s shock reelection sparked a selloff that continues to ripple through financial markets.

The benchmark Selic will hit 13.5% this December, up from the previous estimate of 13.25%, according to the central bank’s weekly economist survey published Tuesday. At the end 2027, the rate is now expected to stand at 12.5%, up from 11.75%, while the 2028 forecast rose a full percentage point to 11% and the 2029 projection increased a quarter point to 10.25%.

Economists in the survey also lifted their inflation estimates further above the 3% target through 2029.

Brazil’s currency, the real, fell as much as 1.4% following the survey’s release, while many longer-term interest-rate futures — an indicator of investor expectations for monetary policy — rose in Tuesday morning trading. Brazil’s benchmark stock index Ibovespa declined 1.5% at the start of the session.

Lula, as the leftist is known, defied his far-right challenger and prediction markets on Oct. 25, winning the presidential runoff after losing the initial vote weeks earlier. The result surprised investors who had bet heavily that a change in leadership would usher in tighter fiscal policy and a more business-friendly stance. Most analysts now expect central bankers to pause their easing cycle at their decision this Wednesday and hold rates steady at 13.75%.

Read more: Lula’s Winning Political Instincts Raise Brazil’s Financial Risk

Public spending has soared in recent months as the 81-year-old president moved to combat inequality and secure an unprecedented fourth term. Those expenditures have added to inflation pressures and fueled concerns that Brazil’s debt is reaching unsustainable levels.

Members of the administration have pushed back against the reaction from financial markets, saying concerns about expenditures are overblown. Finance Minister Dario Durigan told reporters Tuesday the government was intent on getting public accounts in order.

“We’ll find effective ways to strike a balance and improve the fiscal situation,” he said.