1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 100
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
One- and two-year inflation expectations sit near the upper limit of the BCB's inflation target
8.0%
6.0%
4.0%
2.0%
0.0%
2020
2021
13-24 mth inflation exp.
2022
2023
12 mth inflation exp.
2024
Target upper/lower limit
2025
Inflation target
Source: BCB, Scotia Wealth Management.
October elections add complexity to building a strong case for deeper BCB cuts than what
markets and economists currently project. In a bubble, the convergence of weak growth and
inflation would perhaps justify a faster rate of easing. Economic growth would be weaker were it
not for fiscal policy that is expected to boost GDP by 0.5-1.0 p.p. in 2026 – potentially half of
overall projected growth – through measures such as low-income tax exemptions or electricity
bill subsidies. Without such stimulus measures, growth would clearly be much weaker, reflecting
a greater need for lower rates. Of course, Lula’s government is unlikely to pull back support for
low-income households in an election year – and may even ramp up stimulus in coming months
to improve the incumbent’s shot at re-election. In effect, there is a floor to how weak Brazil’s
economy can get before fiscal policy steps in to prevent more pronounced weakness.
Economists expect a fifth consecutive year of ~8% public deficits to 2027
0%
-3%
-6%
-9%
-8.1%
-7.7%
-8.7%
-12%
-15%
2020
2021
2022
2023
12mth rolling deficit (%, GDP)
2024
2025
2026
2027
BCB survey median (annual avg)
Source: BCB, Scotia Wealth Management.
Currently, it is anyone’s guess who will win the October 2026 election. For the first round on
October 4, 2026, polls show Lula with about 50% voting intention among respondents who
expressed a candidate preference, while the remaining possible contenders split the other half.
Lula will likely have to face off against a conservative candidate in the second-round vote
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