November 28, 2024, it is a day that will be remembered in Brazilian economic history. That night, Economy minister Fernando Haddad announced a much-anticipated cost-cutting package for the market on a national broadcast. Until then, warnings had been issued about the country's fiscal risk, and more decisive action was expected from the government to curb spending. Haddad spoke for a few minutes and publicized a cut of R$70 billion in two years. With it, he also brought a surprise: the government had compromised on exempting income tax for those who earned up to R$5,000 a month (a topic pending a vote in Congress). This was the key to the dwindling confidence of market agents in the government, reaching its all-time low.

In the following weeks, the US dollar reached 6.19 Brazilian reais – in a phenomenon hitherto little understood among market analysts, but certainly motivated by a lack of trust- and the pricing of future interest rates, DI, skyrocketed. In September 2025, the country is living with a Selic rate of 15% per year, as the Central Bank attempts to curb inflation, and with growing mistrust in the country’s fiscal solidity. In practice, we live in a year that never ended to this day – and that points to a structural challenge in our economy.

“Society is having difficulties – to find a balance between economic growth, which allows the consumption improvement and wellbeing to the less favored, while, simultaneously, generating low interest and sustainability”, says Samuel Pessoa, adjunct researcher of the Brazilian Economics Institute (Ibre) of Fundação Getulio Vargas (FGV) and associate of Julius Baer Family Office.

This skepticism was mixed with the performance of economic activity. In January, market expectations for growth were at 1.6%. As it has been since 2021, the data exceeded expectations: a 3.4% increase in 2024, marking two consecutive years of growth above 3%.

This result was driven by the government’s fiscal expansion, the resilience of the job market, and the country's credit expansion, according to economists. If more growth is beneficial, this movement must occur on sustainable foundations and with controlled inflation, or within the stipulated goals, which predicts a tolerance range of between 1.5% and 4.5%.

Last year, the previous 12-month IPCA, an index that measures inflation, consistently surpassed goals from October to December, a behavior which repeated itself in 2025, when every month registered a 12-month increase above target.

“The economy has had a robust development”, says Andrea D’Amico, CEO of Busysidebrazil Economic Consultancy. “Fiscal expansion explains part of the surprise. Another part comes from credit, which has grown exceedingly both for the physical person and juridical person, besides the very resilience of the job market itself.”

These inflationary pressures have altered how monetary policy is conducted, a responsibility of the Central Bank. Throughout the year, the Central Bank drastically altered its conduct. The Selic rate dropped from 11.25% a year in January to 10.5% in July. This cycle, however, changed significantly from September, when the Monetary Policy Committee (Copom) began monetary tightening with an eye on inflation, which was already rising, mainly due to future expectations that were unanchored in economic terms.

In December, tax rates ended the year at 12%, an increase of 0.75%, with a sign of two 1% increases in the first meetings of 2025. “There has been an acknowledgement that economic activity was stronger, and this also ended up putting some pressure on service inflation”, says D’Amico.

This was added to an adverse foreign landscape. Throughout the year, the DXY index, which compares the American dollar to a basket of strong currencies, increased from 102.4 dollars in January to close the year at 108.9 dollars. The increase shows the strengthening of the American currency, and, consequently, the weakening of emerging currencies. The Brazilian real was strongly impacted. “In our case, because we have this fiscal fragility, we ended up being heavily penalized by the dynamics of a strong dollar”, affirms D’Amico.

According to BTG Pactual (the same control group as EXAME), there has been a 25% currency depreciation of the real until the second week of December 2024. “The perspective of the continuous growth of public debt has elevated fiscal risk and contributed to a significant currency depreciation through the year”, affirms the bank on the occasion. Some institutions went as far as to project 1 dollar being worth 7 Brazilian reais in 2025.

In the United States, specifically, the year was also marked by a break from expectations regarding interest rate cuts. At the beginning of the year, Goldman Sachs, for example, was expecting five cuts a year, the first of them in March. In reality, American inflation data had been under pressure until April, which delayed this process.

In September, the Fed made the first of its three cuts, which lowered interest rates from 4.75% to 4.25%. With fewer cuts in the United States – and higher taxes – the attractiveness of emerging markets dropped.

Besides, the country elected Donald Trump to a new presidency last year, in an election that drastically amplified geopolitical instability. In the first moment, there were bets in an administration that would deliver on its promises, and that excited the market. This year, however, it became clear with the tariff war that Trump is willing to change the global commerce landscape.

The adverse external scenario adds complexity to the work that the government “undertook” in the first two years of its administration — and which will have to be done in 2025 and 2026. Last year, real primary spending grew by 5.5%. “In 2023, based on 2022, it grew by 8%, then 5.5%, and this year it is growing by 1.5%,” says Pessoa.

Which means that the Lula administration accelerated spending in the first two years – and left some “leftovers” to this next one, such as the vale-gás [a social benefit that help families to buy gas for domestic use], private payroll loans, and income tax exemption for those earning up to R$5,000. “It’s as if the government said: ‘I want to include poor people in the budget, but I don’t have enough tax burden’. So, make new politics and ‘hold’ tax economy”, affirms Pessoa.

It is a way to slow down the economy while maintaining a balance of spending and serving people through targeted public policies. For him, the good news is that fiscal and monetary policies are “in sync” at the moment to try to produce a “soft landing” for the Brazilian economy. “The economy remains heated, but its speed is reduced,” says Pessoa. “It's a super-difficult operation they're doing, and it has a chance of working.”

All of this, however, comes at a price. And a price that the market grasped on that fateful day of November 28 last year. “The side effect of this is an increase in public debt,” says Pessoa. In 2024, the General Government Gross Debt (DBGG) closed at 76.5% of GDP—up from 73.8% in 2023. It is the pace of growth that is worrying.

In July of this year, the Ministry of Economy revised its estimates and delayed the peak of the DBGG to 2028, when it is expected to reach 84.3% of GDP. The previous forecast had predicted 81.6% for this year. It is this behavior of the debt trajectory — perhaps one of the most repeated jargons in Brazilian economic coverage — combined with stubborn inflation, especially in services, that reinforces the thesis of a cycle of high interest rates.

“And this very long cycle of high interest rates is hurting the private sector's balance sheet,” says Pessoa. “You keep promising the future, and the private sector becomes intimidated.”

This year, Brazil is experiencing a certain calm in the economic arena. According to Fabio Kanczuk, former director of Economic Policy at the Central Bank and director of macroeconomics at Asa Investments, the recent cooling of inflation is linked to the devaluation of the dollar—the real appreciated more than 15% from January to mid-September 2025. “The fall of the dollar from 6.20 to 5.30 reais has had a positive effect on inflation,” he says.

But this calm in the economic field contrasts with the intensity of the political news.

In practice, the 2026 election scenario has been brought forward, either by the government or by market expectations. And part of that future will be shaped by former President Jair Bolsonaro's decision on whom he will support in 2026 — whether someone from his family, such as his wife, Michelle Bolsonaro, or the governor of São Paulo, Tarcísio de Freitas. Bolsonaro is ineligible and was recently sentenced to 27 years in prison by the Brazilian Supreme Court. “This scenario seems calm, but depending on Bolsonaro's decision, there are totally different paths,” says Kanczuk.

The electoral discussion, which has dominated the debate since 2024 and will continue to do so until October 2026, however, hinders other issues that need to be addressed in the economy. From a structural perspective, Brazil has a relatively low productivity growth rate and suffers from a chronic fiscal deficit.

“This means that fiscal policy is unsustainable. And the problem with this is that, given that it is unsustainable, there will be a correction ahead,” says Pessoa. “Since no one knows how this will happen, there is a source of immense uncertainty, which prevents us from having a long cycle of growth.”

The discussion is not simple. But laying the groundwork for a long cycle of growth in a country that is aging rapidly and needs to produce more wealth to distribute it is an excellent first step.