By Marcela Ayres

BRASILIA (Reuters) – Economists have raised their projections for Brazil's borrowing costs at the end of the tightening cycle, following the central bank's accelerated rate hike. Despite a more aggressive rate path, inflation remains above the target.

On Thursday, futures markets started to reflect expectations that Brazil's central bank will continue raising rates through July next year, with the Selic benchmark rate projected to exceed 14%.

Policymakers on Wednesday raised rates by 50 basis points to 11.25% and indicated the possibility of further increases, emphasizing that the pace and total scope of the tightening cycle are strongly linked to their commitment to returning inflation to target.

The central bank has raised its inflation estimate for the relevant horizon to 3.6% for the second quarter of 2026, surpassing the official target of 3%. This forecast assumes rates will peak at 12.5% next year.

When the bank's monetary policy committee, Copom, began raising rates in September, it projected inflation at 3.5%, anticipating a lower terminal Selic rate of 11.5%.

According to XP, this suggests that other inflationary pressures are outweighing the projected monetary tightening effects, and their 'flight plan' likely envisions a terminal Selic rate above 12.5%. XP now expects the Selic to hit 13.25% by the end of the tightening cycle, an increase from their previous forecast of 12%, reflecting four additional 50 basis-point hikes ahead.

Additionally, UBS BB increased its forecast for the Selic peak to 12.75% in March, up from a previous forecast of 12.25% in January. JP Morgan revised its terminal Selic rate to 13%, acknowledging that initially, it expected a coordinated global easing to alleviate exchange rate pressures, allowing a smaller rate hike cycle than the market anticipated.

However, the global environment now appears more uncertain, and a reduced easing abroad is likely to keep the real more depreciated than initially expected.