Brazil’s Central Bank hiked its benchmark interest rate, the Selic, to 15%, the highest since 2006, suggesting a firm stance against ongoing inflationary pressures.
The decision, made following the most recent meeting of the Monetary Policy Committee (Copom), represented the seventh consecutive increase, this time by 0.25 percentage points.
According to local media Money Times, while the committee hinted at a halt in rate hikes at its next meeting in late July, it stressed that the present contractionary stance will be maintained “for a very long period.”
Itaú Unibanco predicts the Selic rate will remain constant until 2025, with a possible 200 basis point decrease starting in early 2026.
This extended plateau illustrates the Central Bank’s cautious attitude in the face of persistent inflation over its target range.
Inflation expectations drive policy decisions
The decision to maintain the tightening cycle arises from growing concerns about unanchored inflation expectations and economic risks.
Inflation predictions for 2025 and 2026 remain elevated, at 5.2% and 4.5%, respectively, both exceeding the Central Bank’s goal.
Even the Bank’s prediction for 2026, the current key horizon for monetary policy, is 3.6%, which is still above the middle of its inflation target band.
Several inflationary threats remain in the spotlight.
These include the possibility that inflation expectations will remain unanchored for an extended period, a more resilient services sector as a result of a narrow output gap, and domestic and international policy actions that may stoke inflation, such as a prolonged period of exchange rate depreciation.
In contrast, downside risks such as a sharper-than-expected domestic downturn, poor global economic conditions, or falling commodity prices could cause disinflationary pressures. However, these have little influence on the current assessment.
A long plateau ahead before monetary easing
Historical patterns indicate that once a monetary tightening cycle is interrupted, the Central Bank normally holds several sessions, commonly four to five, before reversing course.
Given this history, and barring a significant shift in economic conditions, rate cuts are unlikely until 2026.
However, Itaú suggests that a stronger Brazilian currency could lead to quicker easing by reducing inflation.
On the other hand, stronger-than-expected economic growth might postpone the start of a rate-cutting cycle.
The current Selic rate of 15% demonstrates the Central Bank’s determination to anchor inflation expectations and restore price stability.
By extending the period of high interest rates, officials hope to keep inflation under control and lead it back toward the official goal range, even if it means sacrificing short-term economic growth.
Outlook: stability now, uncertainty ahead
The Central Bank’s decision paves the way for a long period of elevated borrowing costs in Brazil, with far-reaching consequences for investment, consumer spending, and credit availability.
Despite potential economic consequences, the country’s monetary officials are counting on a steady hand to steer inflation back on track.
While the next Copom meeting is expected to keep interest rates constant, future movements will be highly influenced by economic statistics, notably inflation and currency stability.
Until evidence of a prolonged decline in inflation emerges, Brazil’s high-interest-rate environment appears to be here to stay – at least for the next 18 months.
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