MNI BCB WATCH: Cautious 25bp Cut Seen Amid War Uncertainty

The Central Bank of Brazil is expected to cut its official Selic rate by 25 basis points for a second time on Wednesday, to 14.50%, which would be considered a cautious move amid external uncertainty, including the effects of the war in Iran.

Beyond the decision itself, market participants will be watching forward guidance and looking for clues on how long this easing cycle is likely to last.

While higher oil prices are pushing up inflation, Brazil may benefit from stronger exports, while the exchange rate remains well behaved. The real has maintained its strength, trading this Monday around BRL4.99 to the dollar, stronger than at the last BCB meeting, when it stood around BRL5.25.

The BCB last month cut rates by 25 basis points to 14.75%, and said it will move with "serenity and cautiousness" to incorporate new information about the depth and duration of the war in Iran. 

Former secretary of economic policy at the Ministry of Finance Manoel Carlos Pires told MNI in an interview that the impact of the war in Iran on the global economy is clearly inflationary, but the BCB wants time to assess the effects on the domestic economy and will temper the pace of easing for now.  (See MNI INTERVIEW: BCB To Ease Gradually As It Assesses War- Pires)

Even after the first 25 basis point cut, the interest rate remains at a high level, Pires noted, adding that such tight policy will tend over time to lead to rising indebtedness and defaults, and create difficulties for otherwise healthy companies in obtaining financing.

Former Treasury secretary Jeferson Bittencourt told MNI that, so far, government measures to contain fuel prices amid the war in Iran are set to have a neutral fiscal impact, but additional measures are likely and could add to inflation expectations and increase fiscal risks. (See MNI INTERVIEW: Iran War Fuels Brazilian Fiscal Risks)

The easing cycle undertaken by the Copom monetary policy committee could now be shorter or more gradual, with a growing consensus that the terminal rate is likely to be closer to 13% than the 12% previously expected, he said.

According to the BCB’s Focus market survey, inflation is expected to end 2026 at 4.86%, a significant revision from 4.31% four weeks earlier, above the 3% target ceiling, which allows for a maximum of 4.5%. For 2027, analysts project 4.00%, and 3.61% for 2028.