(Reuters) -Brazil’s central bank is unlikely to have room to cut interest rates before next year, and even then the risk is tilted toward further delays, economists at Itau Unibanco, the country’s largest private lender, said on Thursday.
Itau chief economist Mario Mesquita told an event in Sao Paulo sponsored by the lender that the central bank likely will keep borrowing costs unchanged for a prolonged period to ensure that inflation expectations return to the official 3% target.
Policymakers raised the benchmark Selic rate by 50 basis points this month to 14.75%, its highest level in nearly two decades, and dropped all forward guidance, stressing the need to maintain restrictive policy for an extended period.
“We believe the central bank likely ended its hiking cycle at the last meeting. But we see no room for rate cuts this year,” Mesquita said.
“Rate cuts will come only next year, with more risk of them being postponed from the first quarter to the second quarter than brought forward,” Mesquita added.
Itau economist Julia Gottlieb, also speaking at the event, said the recent hike in the financial transactions tax (IOF) announced by President Luiz Inacio Lula da Silva’s government – covering corporate credit, private pension contributions and foreign exchange transactions – was equivalent to a monetary tightening of up to 25 basis points.
“There are still discussions underway in Brasilia that could change the final design of the IOF hike,” Mesquita noted, referring to the measure initially expected to generate 20.5 billion reais ($3.60 billion) in revenue this year.
The government has since scaled back part of the package, reducing the expected gain by about 2 billion reais.
Gottlieb also estimated that new rules for payroll-deductible loans could boost Latin America’s largest economy by as much as 0.6 percentage points over a year.
Itau forecasts Brazil’s gross domestic product (GDP) will grow 2.2% in 2025, slowing from 3.4% last year.
($1 = 5.6927 reais)
(Reporting by Marcela Ayres in Brasilia; Editing by Will Dunham)
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