Brazil’s fiscal risks could keep rates higher for longer

The statement accompanying the Brazilian central bank’s meeting yesterday, at which the Selic rate was left at 13.75%, made clear that policymakers are increasingly concerned about fiscal loosening when president-elect Lula takes power. This reinforces our view that Copom will only reverse a small part of the recent tightening cycle over the course of 2023. If anything, the risks are tilting towards a later start to the easing cycle than we have pencilled in (Q2 2023).