Brazilian Central Bank to Keep Selic at 14.75% Through 1st Quarter of 2026 Despite Market Expectations for Cuts, Says Morgan Stanley Economist

The Banco Central of Brazil has maintained the Selic rate at 14.75% until the end of the first quarter of 2026, despite market expectations of cuts. Ana Madeira, chief economist at Morgan Stanley, believes the central bank will initiate a new period of cuts only at the end of the first quarter of 2026, although the market is pricing in reductions before that. Madeira defends that the central bank's recent messages indicate a "higher for longer" approach.

The Banco Central of Brazil has maintained the Selic rate at 14.75% until the end of the first quarter of 2026, despite market expectations of cuts. Ana Madeira, chief economist at Morgan Stanley, believes the central bank will initiate a new period of cuts only at the end of the first quarter of 2026, although the market is pricing in reductions before that. Madeira defends that the central bank's recent messages indicate a "higher for longer" approach [1].

The latest inflation data, released on May 28, 2025, showed a third consecutive monthly slowdown, with the IPCA-15 index falling to 0.36% [1]. This slowdown, which fell below market expectations of 0.44%, has sparked debate over whether the Central Bank should pause or continue its aggressive rate-hike cycle. The IPCA-15 index, a key inflation gauge, showed annualized inflation at 5.40%—still above the government’s 4.5% upper target limit but down from 5.49% in April [1].

Fresh food prices dropped 1.2% monthly due to improved supply chains, while industrial goods rose 0.5% amid retail promotions. Services inflation eased marginally but remained elevated at 6.6% year-over-year, driven by labor-intensive sectors like healthcare and education [1]. The Central Bank’s Monetary Policy Committee (Copom) has raised the benchmark Selic rate six times since September 2024, reaching 14.75% in May—the highest since 2006 [1].

Economists remain split on whether June’s meeting will bring a pause or a final 0.25-point hike to 15%. Analysts at ASA Investimentos and G5 Partners argue the inflation deceleration justifies stabilizing rates, with market derivatives pricing a 76% chance of no change [1]. However, critics like Claudia Moreno of C6 Bank warn that persistent service-sector pressures and a weak exchange rate necessitate further tightening [1].

Brazil’s GDP growth is projected at 2% for 2025, down from 3% last year, as high borrowing costs strain consumers. Fiscal policy risks linger, with public debt at 80% of GDP and new stimulus measures under debate [1]. Global commodity price declines offer short-term relief, but a tight labor market and currency volatility threaten to reignite inflation [1].

Central Bank President Roberto Campos Neto has emphasized that core metrics, including services and industrial goods, remain incompatible with the 3% target. The May data provides a reprieve but no resolution. For businesses, the stalemate means prolonged credit constraints and cautious investment [1].

Economists at Suno Research note that future decisions hinge on June’s activity data and unemployment figures, which could signal whether Brazil’s economy is cooling fast enough to justify rate cuts by late 2025 [1]. Until then, the Selic’s 14.75% floor—a 19-year high—will test policymakers’ balance between curbing prices and avoiding recession [1].

Separately, the head of Brazil's state development bank BNDES, Aloizio Mercadante, called for a reduction in the country's benchmark interest rate Selic, while also proposing higher taxes on online betting [2]. Mercadante argued that a recent controversial hike in the financial transactions tax (IOF) has a contractionary effect, as it raises the cost of credit. He proposed that the central bank could lower the Selic rate gradually, safely, and sustainably [2].

Mercadante also argued that increasing taxes on widely popular online betting platforms in Brazil could help offset the IOF hike and "create an alternative" [2]. The IOF hike, announced on Thursday, targeted certain foreign exchange transactions, corporate credit, and a specific type of private pension funds. It sparked sharp backlash from financial markets, prompting the government to reverse a portion of the tax increase, particularly affecting offshore investments, within hours amid criticism that the measures amounted to capital controls [2].

The tax adjustment was enacted through a presidential decree, bypassing congressional approval, as part of President Luiz Inacio Lula da Silva's broader effort to reduce the spending freeze required to meet this year's goal of eliminating the primary fiscal deficit [2].

References:
[1] https://www.riotimesonline.com/brazils-inflation-slowdown-sparks-debate-over-prolonged-high-interest-rates/
[2] https://www.tradingview.com/news/reuters.com,2025:newsml_L2N3RY0DT:0-brazil-s-bndes-head-calls-for-lower-interest-rates-higher-taxes-on-online-betting/