Brazil’s central bank has warned of a sharp drop in corporate profitability as the country’s aggressive monetary tightening begins to ripple through the broader economy.
In its latest Financial Stability Report, released Tuesday, Banco Central do Brasil projected that the median Return on Equity (ROE) for publicly listed non-financial companies could decline to just 3.92% by September 2025, compared to 8.92% in September 2024, when the current rate-hiking cycle began.
If the forecast proves accurate, it would mark the lowest ROE since September 2017, when Brazil was still recovering from a deep recession triggered by fiscal instability, political turmoil, and a global commodity downturn.
The projected ROE is also worse than during the COVID-19 crisis, which saw profitability fall to 5.54% in mid-2020.
While the bank noted that the impact may be less severe than during the 2015–2016 recession, it stressed that “corporate payment capacity is expected to decline significantly in the short term.”
Selic hikes pressure on corporate earnings
The central bank has lifted the benchmark Selic rate by 375 basis points to 14.25%, pursuing an aggressive stance against inflation.
As of mid-April, annual inflation remained elevated at 5.49%, well above the 3% target, prompting expectations of another hike in May.
Although the tightening has moderated inflationary pressures, it has also raised borrowing costs, hitting corporate profit margins and returns.
The central bank faces a delicate balancing act: reining in inflation without choking off economic activity.
So far, corporate Brazil appears to be bearing the brunt of the adjustment.
Red flags in household credit markets
While corporate credit demand is cooling, the central bank flagged emerging risks in the residential and consumer credit markets.
Credit to households grew in late 2024, particularly among higher-risk and lower-income borrowers, despite elevated interest rates.
Auto loans surged, with more consumers financing older vehicles and making smaller down payments, raising concerns about deteriorating credit quality. Unsecured personal loans also rose, suggesting a loosening of lending standards.
Though financing to the real economy continued to expand, the central bank noted that lenders are becoming more cautious in 2025.
A quarterly survey showed declining risk appetite due to rising household debt and fragile small business finances.
Despite stable overall credit conditions, the central bank warned of potential instability, calling for “increased caution and vigilance” in lending practices.
With another rate hike on the horizon, corporate and consumer sectors alike could face renewed pressure in the months ahead.
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