Brazil Economics & Strategy: Central Bank Preview: one last cut… for now

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Brazil Economics & Strategy: Central Bank Preview: one last cut… for now

IdeaMOn inflation, we expect BCB to tone up the upside risks. BCB inflation forecast

will likely rise to 3.7% for 4Q27 (from 3.5%), pushed by a weaker FX (5.10 vs 5.00)

since the previous meeting, higher 6-month oil prices and marginally higher inflation

expectations. BCB may not change the balance of risks for inflation, but we

anticipate it will emphasize concerns about the de-anchoring - and risks of further

de-anchoring - of inflation expectations, especially longer term ones.

We now expect a higher Selic at 14.00% (vs 13.00% previously) by year-end and

11.00% (from 10.50%) next year. Our rates path considers a pause from the

August meeting onward, with easing resuming at the December meeting with a

25bp pace. The drivers of this change are not so much the macro picture, but more

about the aggressive market pricing movement of late, moving from cuts to hikes in

just a few weeks:

• Why is the driver for higher rates forecast not so much about the macro?

Because i) the upside surprises to inflation have not been that significant and

ultimately have been concentrated on non-core groups, such as food

inflation - core and services inflation have actually come roughly in line with

expectations and are both decelerating on an annual basis; ii) inflation

expectations moved higher indeed, but less so than before the previous

meeting and seem to be stabilizing now; iii) on the activity side, data has

been mixed with some indicators pointing to resiliency, but others continue

to validate an overall deceleration vs 2025.

• Why is the driver for higher rates forecast more about market move? In

theory, BCB does not need to mechanically follow market pricing, especially