(Bloomberg) -- Brazil’s central bank will likely hold its interest rate steady for the fourth straight meeting as inflation expectations rise further above target and President Luiz Inacio Lula da Silva questions the institution’s goals. 

All 32 economists in a Bloomberg survey expect board members to keep the benchmark Selic rate unchanged at 13.75% on Wednesday, when the central bank wraps up its first decision of the year. Policymakers led by Roberto Campos Neto had raised rates by 11.75 percentage points over a year and a half before pausing in September, though they have reiterated that they may resume the monetary tightening cycle if needed.

Brazil’s annual inflation has slowed the most among major emerging economies in recent months, easing to 5.87% in mid-January from a peak of over 12% last year. Still, analysts are running up their consumer-price forecasts as Lula delivers billions of dollars in extra spending, undercutting the effects of higher rates. Complicating the outlook further, the leftist president has also questioned the central bank’s independence and its inflation goals. 

Put together, traders have now erased all bets for borrowing-cost cuts early this year, and most economists have delayed their forecasts for the beginning of an eventual easing cycle to September. 

What Bloomberg Economics Says

“The central bank will have to comment on the rise in inflation expectations. Since the previous meeting, the market consensus rose through 2026. We think at least part of that increase was due to Lula’s remark that the BCB’s inflation targets are too low.”

— Adriana Dupita, Brazil and Argentina economist

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Wednesday’s decision will follow an expected rate hike by the US Federal Reserve. It will be published on the central bank’s website after 6:30 p.m. in Brasilia with a statement from its board. Here’s what to look for:

Fiscal Worries

Investors will dig into comments regarding fiscal policy amid speculation that central bankers may opt for a more hawkish tone after congress approved a bigger-than-expected social aid program.

“The fiscal outlook changed since the last rate meeting,” said Andre Loes, Latin American economist at Morgan Stanley. Central bankers could highlight the need to counteract the fiscal expansion that will increase inflation.

Lula’s team has an additional 168 billion reais ($33 billion) to spend this year on items such as increased paychecks to the poor, and it is discussing a higher minimum wage. Finance Minister Fernando Haddad is expected to present a new spending framework by April, replacing the current law that limits growth of public expenditures to the prior year’s inflation rate.

Analysts are adjusting accordingly, as they now see consumer price increases at 5.74% this year, up from 4.9% when Lula was elected president.

Inflation Goals

Analysts will also be on the look-out for the central bank’s consumer price projections. Annual inflation breached the ceiling of the monetary authority’s tolerance range in December, and there are more challenges on the horizon. 

Tax cuts which lowered transportation costs last year are now fading, with gasoline and housing prices easing down only slowly. Core measures that strip out the most volatile items are above target.

“It’s key to see how central bankers interact with higher inflation estimates,” said Gustavo Arruda, chief economist at BNP Paribas SA. “It’s not just about consumer price increases slowing down. Inflation estimates have to fall as well.”

Most analysts see inflation above the central bank’s 3% mid-term goal through 2025. Expectations are also rising for 2026, which will have its consumer-price target set this year. 

Meanwhile, Lula recently suggested a higher, 4.5% target, while Haddad said Brazil needs an ambitious, yet feasible goal. 

“Expectations haven’t de-anchored yet, but they are on a path that needs to be monitored closely,” by central bankers, said Mauricio Oreng, economist at Banco Santander SA. 

Global Outlook

Brazil central bankers might also comment on international factors including US monetary policy and the end of strict measures against Covid-19 in China.

--With assistance from Giovanna Serafim.

©2023 Bloomberg L.P.