The Central Bank of Brazil has increased its reference rate, the selic, at 15%, the highest since 2006, suggesting a firm position against the current inflationary pressures.
The decision, made following the last 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 did an internship in the rate increases at its next meeting at the end of July, he stressed that the current contraction position will be maintained “for a very long period”.
Itaú Unibanco predicts that the seque rate will remain constant until 2025, with a possible decrease of 200 base points from the beginning of 2026.
This extended tray illustrates the prudent attitude of the central bank in the face of persistent inflation on its target range.
Inflation expectations stimulate political decisions
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The decision to maintain the tightening cycle stems from increasing concerns concerning the expectations of inflation not anchored and economic risks.
The predictions of inflation for 2025 and 2026 remain high, at 5.2% and 4.5%, respectively, exceeding the target of the central bank.
Even the prediction of the bank for 2026, the current key horizon for monetary policy, is 3.6%, which is always above the middle of its target inflation band.
Several inflationary threats remain under the spotlight.
This is in particular the possibility that inflation expectations do not remain anchored for an extended period, a more resilient services sector due to a close production difference and national and international political actions which can stir up inflation, as an extended period of the amortization of the exchange rate.
On the other hand, lower risks such as a clearer than expected interior slowdown, poor global economic conditions or the drop in prices for raw materials could cause disinflationary pressure. However, these have little influence on the current evaluation.
A long plateau to come before monetary relaxation
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Historical models indicate that once a monetary tightening cycle is interrupted, the central bank normally organizes several sessions, generally four to five, before the inversion course.
Given this story and, unless a significant change in economic conditions, rate reductions are unlikely until 2026.
However, Itaú suggests that a stronger Brazilian currency could cause faster easing by reducing inflation.
On the other hand, stronger than expected economic growth could postpone the start of a rate cutting cycle.
The current sequeous rate of 15% demonstrates the determination of the central bank to anchor the expectations of inflation and to restore price stability.
By extending the period of high interest rate, those responsible hope to keep inflation under control and bring it back to the official objectives beach, even if this means sacrificing economic growth in the short term.
Perspectives: stability now, uncertainty to come
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The Central Bank’s decision paves the way for a long period of borrowing costs raised in Brazil, with deep consequences on investment, consumption expenses and the availability of credit.
Despite the potential economic consequences, the country’s monetary officials have a regular hand to bring inflation back on the right track.
While the next COPO meeting is expected to keep the constant interest rates, future movements will be strongly influenced by economic statistics, including inflation and stability of currencies.
Until the proof of prolonged drop in inflation emerges, the high interest rate environment in Brazil seems to be there to stay – at least for the next 18 months.
