Latam Macro Notes: Brazil – Bacen's Tightrope Walk

Research evidence excerpt

Latam Macro Notes: Brazil – Bacen's Tightrope Walk

11 June 2026

Latam Macro Notes

Figure 5: Estimated Policy Reaction Function

Source:IBGE,Bacen,andDeutscheBankResearch

Consistent with the expected behavior of an inflation-targeting central bank,

monetary policy in Brazil responds to various measures of the inflation gap, with

a more pronounced significance observed for the 18-month and 2-year horizon

(Figure 6). Based on our estimates, we simulate the projected policy rate under

each model from 2016 through the end of 2026. Our simulations incorporate our

internal projections for current inflation, the output gap, and the primary balance,

as well as data on expectations from Bacen’s Focus survey, assuming that

expectations do not change (e.g., 13-month ahead expectations from June are

considered 12-month ahead expectations in July, and 19-month ahead

expectations from June are treated as 18-month ahead expectations in July).

Even under this optimistic scenario, where inflation expectations do not further

deteriorate, our models suggest that Bacen would likely implement a maximum

of 100 bp in cuts until the end of 2026 (Figure 7).

Figure 6: Bacen's monetary policy Figure 7: Our estimations of Bacen's

decisions primarily respond to reaction functions indicate limited

changes in 18-month and two-year scope for further rate cuts this year.

inflation expectations.

Source:BacenandDeutscheBankResearch Source:BacenandDeutscheBankResearch

Furthermore, it is important to acknowledge that the fiscal component within our

regression does not fully capture the impact of the large number of credit subsidy

programs currently in place, which do not directly affect the government's

balance sheet. Examples include programs designed to subsidize credit for truck,