Projections for 2024 GDP are close to 3% and increase expectations of higher interest rates

The surprise at the strong performance of the Brazilian economy in the second quarter of the year led economists and the government to revise their growth projections for the year to close to 3%, heating up the discussion about inflationary risks and the prospect of higher interest rates, two weeks before the Monetary Policy Committee (Copom) meeting.

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“(Inflation is) the central point in terms of consequences,” said Rodolfo Margato, an economist at XP, about the growth of the Gross Domestic Product. “The strength of activity was what supported our scenario review, considering a monetary tightening cycle starting in September.”

XP predicts increases in the basic interest rate in the next four Copom meetings, with the tightening cycle ending in January 2025 with the Selic at 12.0%.

The Central Bank will meet again to discuss monetary policy on September 17 and 18. With the Selic currently at 10.5%, the monetary authority will already have in hand, in addition to the GDP figures, the IPCA data for August to support its decision.

“Interest rates in Brazil are high, but not that high, because GDP is growing,” said Rafaela Vitória, chief economist at Inter, who has an upward bias in her outlook for maintaining the Selic rate.

“We have an expansionary fiscal policy and a contractionary monetary policy. The fiscal policy is winning the battle, but it is dangerous. There needs to be harmony because the growth rate cannot be sustained at this level with a real interest rate of 6%, which impacts investments.”

In fixed income, short-term DI (Interbank Deposit) rates were operating in positive territory this early afternoon, in the wake of GDP data. The perception that the heated economy could put pressure on inflation was boosting the DI rate for January 2026, one of the most liquid: at 1:18 p.m. it was at 11.97%, up 9 basis points from the previous day’s adjusted 11.882%.

The curve, however, continued to indicate greater chances of the Selic benchmark rate rising 25 basis points this month, rather than 50 basis points. Also at 1:18 p.m., the curve priced in a 64% probability of a 25-point hike, versus a 36% chance of a 50-basis-point hike.

The economic team itself raised uncertainties about interest rate policy and a possible inflationary risk with stronger growth shortly after the release of IBGE data on Tuesday showing that GDP expanded 1.4% in the second quarter, after growing 1.0% in the first, in an upwardly revised figure. Analysts had expected growth of 0.9% in the second quarter.

“We have to pay close attention to investment because it is what will guarantee growth with low inflation. If we do not increase our installed capacity, there will come a time when we will have difficulty growing without inflation,” said Finance Minister Fernando Haddad after the data was released.

The better-than-expected result raised the prospect that GDP will grow close to or even above 3% this year. Inter, XP and C6 Bank have already revised their estimates.

Citi also started forecasting 3% growth and expects the Selic rate to rise this month. “Overall, the second-quarter GDP reinforced the view of a mismatch between the expansion of demand and supply,” it said in a note.

Haddad predicted that his ministry’s new projection for GDP growth, to be released in September, should exceed “2.7% or 2.8%”, compared to the current 2.5%, while the Planning Minister, Simone Tebet, said that the figure could be close to 3%.

The resulting inflationary pressures from strong activity should remain a focal point in the second half of the year, even if the pace of expansion loses momentum.

GDP growth estimates for the third and fourth quarters are around 0.5%, largely because the boost in consumption in the first half of the year was fueled by tax benefits and the payment of court orders, which are unlikely to be repeated.

“(The GDP) should slow down to a growth level closer to 0.5% or even lower, not only because there will be no fiscal stimulus but also because there may be lower spending,” said Vitória, from Inter.