Key Takeaways:
Brazil's central bank cut its benchmark Selic rate for a third straight meeting Wednesday, pressing ahead with easing even as inflation accelerates and the fiscal deficit widens.
The monetary policy committee, known as Copom, lowered the Selic by a quarter percentage point to 14.25%, matching the consensus forecast in a Bloomberg survey of 30 economists. Three of those surveyed had expected a hold. The decision extends a cutting cycle that began in late April after the rate sat at 15% for nine months, and it came on the same day the US Federal Reserve held its own rate steady under new chair Kevin Warsh.
"The global environment remains uncertain due to the lack of definition on the terms of the agreement for the end of the armed conflicts in the Middle East, and the consequences of the already materialized effects of these conflicts until this moment, altering global financial conditions," Copom said in its statement.
The committee stopped short of offering explicit guidance on the path ahead, a dovish signal that Goldman Sachs economist Alberto Ramos said leaves the door open for further easing. "They could have come up with a harder guidance, elevating the bar for additional cuts, but they are not saying that," Ramos said.
The decision comes as consumer prices rose 4.72% in the 12 months through May, accelerating from 4.39% in April and running well above the central bank's 3% target, which has a tolerance range of 1.5 percentage points. Analysts surveyed weekly by the BCB forecast inflation ending 2026 at 5.3%. The Selic is expected to end the year at 13.75%, according to the same survey, implying another 50 basis points of cuts over the remaining meetings.
Fiscal and external headwinds complicate the path
The government's fiscal position adds a layer of risk. Brasília's budget deficit stood at 9.4% of GDP in April, while public debt reached 80.4% of output, according to central bank data. Spending is likely to remain elevated ahead of October's general election, where President Luiz Inácio Lula da Silva seeks re-election in a tight race. Economists say loose fiscal policy fuels inflation and limits how far the central bank can cut.
"The fiscal is probably one of the reasons along with the stickiness of inflation" that will keep the easing cycle slow, said Nancy Lazar, chief economist at Piper Sandler.
The external picture is mixed. An Iran peace deal expected to be signed Friday could lower oil prices — crude has traded near US$100 a barrel — and ease imported inflation. Brazil is a net exporter of oil but relies on imported fertilizers that have become more expensive because of the conflicts in Ukraine and the Middle East. The Brazilian real has weakened 1% against the dollar since the Iran conflict began, adding to import costs.
"If the peace lasts and weakens oil prices, inflation could cool down and the economy may strengthen," Lazar said. "Lower energy prices further increase the odds you could see some further, more aggressive slowdown in inflation."
The last time the BCB cut rates while inflation was accelerating above 4.5% was in mid-2024, a cycle that was interrupted after three meetings when the real weakened sharply and the Fed turned more hawkish. The Ibovespa slipped 0.45% Tuesday to close at 169,648 points, while the dollar firmed to around 5.09 reais ahead of the decision.
Economic growth remains sluggish. Gross domestic product expanded 1.8% in the first quarter from a year earlier, slowing from 2.3% in 2025. Analysts surveyed by the BCB forecast full-year 2026 growth of 1.96%. The labor market has shown some resilience, Copom noted, with cyclical sectors returning to play a larger role in activity.
Steven Schoenfeld, chief executive of MarketVector Indexes, which tracks Brazilian markets, said the central bank wants to keep cutting but must tread carefully. Factors that could support further easing include cooling inflation, less government spending and a more dovish Fed, he said.
This article is for informational purposes only and does not constitute investment advice.
