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If this is confirmed, the prospect of cutting basic interest rates is automatically postponed, ‘sine die’, and the start of a new cycle of increases is not entirely ruled out in the short term. This is because the latest projection from the Focus bulletin (a survey by the Central Bank of the 100 largest financial institutions in the country) points to an IPCA of 5.11% for this year (13th consecutive increase), even exceeding the inflation target ceiling set at 4.5% by the National Monetary Council (CMN).
Internal and external factors weigh on the board’s decision
This possibility is reinforced by factors both external and internal. In the first case, the geopolitical effects of the conflict in the Middle East on the global economy—such as the escalation of monetary tightening by central banks, following the rise in oil and gas prices—and, in the second, the resilience of inflation, directly associated with the deepening of the government’s fiscal imbalance (expenses exceed revenues), which prioritizes its re-election next October. But there is also the impact, of still unpredictable magnitude, on the region’s agriculture from the arrival of the super El Niño.
But the shadow of high costs is not only local, as ‘imported inflation’ emerges, which is when prices rise globally and international freight costs also increase, with these costs being passed on to products purchased from abroad. Thus, global inflation may force the Central Bank to review the trajectory of monetary easing, that is, the reduction of interest rates.
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Blue3 outlines two distinct scenarios for the Selic
Regarding the monetary outlook for the Brazilian economy, the chief economist of Blue3 Investimentos, Roberto Simioni, outlined two basic scenarios: the first is based on the possibility of the energy crisis lasting no more than two quarters, which would allow the Central Bank to maintain the Selic at the current level until the end of the year. The second scenario, where inflationary pressure would persist for more than three quarters, would require a ‘more vigorous correction of the basic rate’.
On the external front, Simioni perceives a structural change on the part of central banks in various countries, in the face of persistent inflationary pressures in their respective regions. “It is also observed that central banks are showing signs of possible reversals in their monetary policy,” says the economist, citing the cases of the Bank of Korea and the Bank of Japan.
Major central banks face a similar challenge
In his assessment, the European Central Bank (ECB), the Bank of England (BoE), the Federal Reserve (Fed), and the Central Bank of Brazil will face the same challenge in the medium term. “There is an expectation of how these central banks will act in the face of inflationary challenges: whether they will promote more proactive adjustments in terms of magnitude or whether they will prefer smaller steps.”
If the minority forecast of a 0.25 percentage point (p.p.) cut is confirmed, the Selic would drop from 14.50% to 14.25% per year, followed by the interruption of the rate reduction cycle due to inflationary pressures (internal and external) and a high degree of uncertainty abroad. With a shorter ‘easing’, the indicator would reach the end of 2026 at a level of 13.50% per year.
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