Brazil’s central bank poised to hold rates at 15% as inflation pressures persist

Brazil's central bank will most likely keep the benchmark Selic interest rate at 15% on September 17, the second decision after the July hiatus in the tightening cycle.

The Monetary Policy Committee, or Copom, tightened rates by 450 bp since Sept/2024, before a pause two months ago.

In the most recent Reuters poll carried out Sept 8-12, all 41 economists predicted zero movement in borrowing costs as policymakers face pressure to hold borrowing works constant.

Recent pressures on consumer prices have pointed to some easing, but analysts say the decision reflects caution with inflationary pressures stubbornly high, a labour market that is still quite tight and potential external risk.

Inflation shows mixed signals

Brazil's consumer price index declined 0.11% in August compared to the previous month, marking the first monthly decline in a year.

On an annual basis, however, prices grew 5.13%, remaining considerably above the central bank's 3% target, which allows for a 1.5 percentage point tolerance band.

In August, service costs rose 0.39%, indicating continued underlying pressures caused by historically low jobless rates. Economists say that this dynamic validates Copom's choice to maintain its holding stance.

"Although the central bank has made progress in bringing inflation closer to its target, it still faces a tight labour market and an uncertain international environment," said Jose Alfaix, economist at Rio Bravo Investimentos.

He stated that while the appreciation of Brazil's currency has been beneficial, its long-term viability remains dubious.

Expectations still above target

Inflation forecasts taken in the central bank's weekly poll are still above the 3% midpoint, although conditions related to a stronger real this year have improved considerably.

Last month, central bank chief Gabriel Galipolo reiterated the need to maintain "restrictive" borrowing costs, citing the pace of convergence of inflation expectations regarding the official target as unduly slow.

"Inflation expectations remain unanchored, while the underlying services core trend remains high, with a very gradual cooling," said economist Julio Cesar de Mello Barros of Banco Daycoval.

"Given this scenario, the central bank should reinforce its message of caution and the need for a restrictive monetary policy for an extended period," the economist added.

Added to the cautious tone is increased uncertainty over new US tariffs on Brazilian imports, which have influenced the central bank's recent posture.

Policymakers are anticipated to use external risks as a reason for keeping interest rates higher for longer.

Market outlook on timing of cuts

While Copom is expected to remain stable in September, investors are divided on when rate decreases will begin.

Of the 36 economists who replied to the survey question on timing, 10 projected the first shift in December, 13 in January, nine in March, and the rest in other months. Copom does not meet in February.

Regarding the probable amount of the next adjustment, 23 respondents expected a modest 25-basis-point reduction, while 12 predicted a 50-point cut. One forecaster predicted a larger 100-point move.

Selic path through 2026

The median quarterly projection suggests that the Selic rate will continue at 15% through the end of 2025.

Economists predict a gradual reduction starting in early 2026, with the benchmark anticipated to fall 75 basis points to 14.25% by the end of Q1.

The outlook reflects the central bank's emphasis on caution. Despite success in limiting inflation, structural pressures in services and labour, combined with international uncertainty, have encouraged Copom to maintain its restrictive policy.

For the time being, the Selic appears to be at its highest level in decades, as officials await more concrete indications of disinflation.