The unanimous cut was fully priced and the BRL reaction will hinge on the tone around future easing rather than the decision itself. The explicit flagging of fiscal stimulus as an inflation upside risk is a hawkish signal that limits how far Copom can ease ahead of October’s election without undermining its credibility. Rising inflation expectations across 2026, 2027 and 2028 horizons suggest the market is already questioning the bank’s ability to anchor prices. Capital Economics sees only 50 basis points of further cuts across the next four meetings, a notably shallower path than earlier in the cycle. El Nino weather risks and a potential two-day working week bill add further supply-side pressure. The BRL remains vulnerable to any reassessment of the easing path if inflation continues to accelerate.
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Brazil’s Copom cut the Selic rate by 25bp to 14.25% for a third straight meeting, keeping next steps open while flagging election-year fiscal stimulus as a new upside risk to inflation. (186 chars)
Summary:
Source: Copom policy statement and post-meeting commentary
- Copom unanimously cut the Selic by 25bp to 14.25%, a level last seen in May 2025; 41 of 45 economists had forecast the move
- Next steps left deliberately open; total easing magnitude will depend on incoming data
- Fiscal stimulus from President Lula flagged as an upside inflation risk that may weaken monetary policy transmission
- 2026 inflation forecast raised to 5.2% from 4.6%; 2027 forecast lifted to 3.7% from 3.5%, both above the 3% target
- Capital Economics forecasts 50bp of further cuts across the next four meetings, bringing Selic to 13.75% by year-end
- Additional risks include El Nino weather effects and a proposed congressional bill guaranteeing workers two days off per week
Brazil’s central bank cut its benchmark Selic rate for a third consecutive meeting on Wednesday, lowering it by 25 basis points to 14.25%, while signalling that the easing cycle faces increasing headwinds from a deteriorating inflation outlook and election-year fiscal pressure.
The rate-setting committee Copom voted unanimously for the cut, which had been forecast by 41 of 45 economists surveyed by Reuters. The decision brings the Selic to its lowest level since May 2025, continuing a calibration cycle that began in March after the bank judged its earlier tightening had sufficiently cooled activity and lending.
But the accompanying statement introduced a notable new concern. Policymakers explicitly identified economic stimulus measures being rolled out by President Luiz Inacio Lula da Silva ahead of October’s election as an upside risk to inflation, warning it could weaken the usual transmission channels of monetary policy. The bank also raised its 2026 inflation forecast to 5.2% from 4.6% and its 2027 projection to 3.7% from 3.5%, both further above the official 3% target.
Annual inflation hit 4.72% in May, and market expectations have risen across near and longer-term horizons, raising questions about the bank’s ability to anchor prices independently of current shocks. Governor Gabriel Galipolo has separately flagged El Nino as an additional supply-side risk, while a congressional bill that could guarantee workers two days off per week adds further potential cost pressure in a tight labour market.
COPOM stands for Comite de Politica Monetaria, which is Portuguese for Monetary Policy Committee. Brazil’s central bank, the Banco Central do Brasil, uses the Portuguese acronym rather than an English equivalent, in the same way the European Central Bank’s rate-setting body is called the Governing Council or the US equivalent is the FOMC. It was established in 1996, modelled partly on the US Federal Open Market Committee structure, and meets eight times a year to set the Selic rate.
