Brazil's Finance Ministry announced a significant upward revision to its inflation forecast for the year on Monday, attributing the change primarily to higher oil and fuel costs linked to the conflict in the Middle East. The ministry now expects inflation of 4.5% for the year, up from the 3.7% projection published in March.
The updated projection sits at the upper bound of the central bank's official target range - the target is centered at 3.0% with a tolerance of 1.5 percentage points in either direction.
In its explanation, the ministry's economic policy secretariat said the average oil price estimate for 2026 has increased by 25% since the prior forecast two months earlier, bringing the average expected price to $91.25 per barrel for the year. That increase in the oil-price assumption outweighed the disinflationary effect the ministry expects from a stronger real by year-end, according to the statement.
The projection also incorporates the effects of mitigation measures the Lula administration has adopted to limit the degree to which rising fuel prices are passed through to domestic consumers. Those policy actions are reflected in the ministry's inflation calculations.
Alongside the inflation revision, the government adjusted its view of the forthcoming monetary easing cycle that began in March. The Finance Ministry now projects the benchmark Selic interest rate will be 13% at the end of this year, up from the 12% end-2026 estimate it had previously published. The Selic is currently 14.5% after policymakers implemented two consecutive reductions of 25 basis points each.
Despite these internal revisions, the government retains a more optimistic stance than market forecasters. Economists surveyed weekly by the central bank have continued to lift their inflation estimate for the year for a 10th straight week, reaching a median forecast of 4.92%. Those economists also expect the Selic to conclude the year at 13.25%.
On growth, the government left its economic expansion forecast unchanged at 2.3% for 2026. The ministry highlighted an anticipated slowdown in activity during the second and third quarters, followed by a modest pickup toward year-end. By contrast, the median estimate in the central bank's weekly economist survey points to gross domestic product growth of 1.85% for this year.
Key points
- Inflation forecast for the year raised to 4.5% from 3.7% due to higher oil and fuel prices.
- Average oil price estimate for 2026 up 25% to $91.25 per barrel since the last forecast two months ago.
- Government now expects the Selic to end the year at 13%, compared with a previous forecast of 12%; the Selic currently stands at 14.5% after two 25 basis-point cuts.
Risks and uncertainties
- Further oil-price volatility could keep inflation elevated, affecting energy and consumer price-sensitive sectors.
- A shallower rate-cut cycle would maintain higher borrowing costs for banks, corporates, and households than previously anticipated.
- Differences between the government's outlook and market/economist expectations create uncertainty for financial markets and policy forecasting.