Brazil central bank sees inflation above target for years as oil prices lift outlook

By Marcela Ayres

BRASILIA, March 26 (Reuters) - Brazil's central bank expects inflation to pick up later this year, largely driven by higher oil prices due to the U.S.-Israeli war on Iran, and to remain above its 3% target throughout its entire forecast horizon.

In a quarterly monetary policy report released on Thursday, the monetary authority estimated 12-month inflation at 3.1% in the third quarter of 2028, the furthest period of its projections.

The forecast comes as a spike in oil prices due to the war in the Middle East stoked global inflation concerns - one of the reasons behind the bank's modest interest rate cut last week that was smaller than initially expected.

"There is great uncertainty regarding the unfolding, duration, and intensity of the conflict," the bank's interim director of economic policy, Paulo Picchetti, told a news conference.

Governor Gabriel Galipolo said the central bank needed time to understand the implications of the conflict, adding: "We will learn more by the next policy meeting."

PROJECTIONS EXCEED CENTRAL BANK GOAL

Policymakers said annual inflation, which clocked 4.26% last year, is expected to decelerate to 3.6% in the first quarter of 2026, but then trend higher through the end of this year. It should later resume a downward path, "while remaining above the target".

After disclosing last week a 3.9% inflation forecast for this year, the central bank also revealed in the report a 3.3% projection for full-year 2027.

The bank last week began a long-anticipated easing cycle, cutting rates by 25 basis points to 14.75% but offering no forward guidance.

For the central bank's relevant monetary policy horizon - the third quarter of 2027 - inflation projections were hiked by 0.1 percentage point from the previous report.

"Among the factors contributing to the increase are higher oil prices and a revision to the output gap," it said.

Itau economists said oil price projections in the report may be more benign than some more realistic estimates, adding that the bank could be underestimating upcoming short‑term inflation readings.

"In our view, this set of information (still subject to change depending on the geopolitical backdrop) narrows the room for an acceleration of the monetary‑easing pace at the April meeting," they wrote in a note to clients.

In the report, the central bank also maintained its estimate for 1.6% gross domestic product growth this year.