(Bloomberg) -- Brazil's central bank lifted its economic growth forecasts for this year and next as policymakers pledge higher interest rates to tame inflationary pressures from overheated activity.
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The bank expects gross domestic product to expand 3.5% this year, marking the fourth straight increase in its estimates that had previously stood at 3.2%, according to the quarterly inflation report published Thursday. By comparison, analysts surveyed by the monetary authority see the economy rising 3.42% in 2024 while the government forecasts 3.3% growth.
For 2025, the bank now sees GDP expansion at 2.1%, up from the prior estimate of 2%.
Latin America's largest economy continues to surprise both analysts and policymakers with its resilience to high interest rates. Central bankers led by Roberto Campos Neto lifted borrowing costs to 12.25% last week while also pledging two additional hikes of a full percentage point each.
Activity is getting a boost from public spending that's also stoking market fears of debt crisis. For next year, board members expect stronger agricultural production. Overall, Brazil's economy remains "robust" with activities linked to the economic cycle "growing strongly," they wrote in the inflation report.
Investors are dumping the Brazilian real as skepticism grows over President Luiz Inacio Lula da Silva's pledges to shore up government coffers. The announcement of a plan to cut 70 billion reais ($11.1 billion) in spending in two years and also introduce tax breaks for low-income workers cemented the idea that the leftist president is still seeking to boost growth through consumption.
Analysts see the government missing its fiscal target next year and estimate the spending cut will have a smaller impact on public accounts, central bankers wrote. "Overall, the fiscal package doesn't seem to have resulted in a positive initial impact around analysts perceptions," they added.
Currency Intervention
A strong capital outflow prompted the central bank to step into the currency market for three straight days in mid-December, when it sold about $6 billion in the spot market while also auctioning credit lines. On top of that, the monetary authority plans to sell as much as $3 billion later on Thursday.
Yet, the real remains the worst performer among major currencies, weakening about 22% this year. A "sharp" exchange rate depreciation is adding to prices pressures, central bankers said.
On top of that, policymakers see higher-than-expected food prices contributing to annual inflation that will remain above the bank's 3% target.