Brazil’s Monetary Policy Committee (Copom) began its penultimate meeting of 2026 on Tuesday, with its interest-rate decision due Wednesday. Market expectations have shifted sharply in recent days, making the outcome a central focus of the week’s economic agenda.

Options contracts traded on B3 showed that, as of October 23, investors assigned a 76% probability to a rate cut at the November meeting and 17.5% to keeping rates unchanged. By October 30, the balance had reversed: 72.5% of the market expected rates to remain where they are, while 26% continued to anticipate a cut.

The change followed the October 26 confirmation of Luiz Inácio Lula da Silva’s re-election for a fourth presidential term. Market participants have pointed to a weaker real and higher risk premiums attached to Brazil, alongside concerns about the fiscal outlook, as factors affecting expectations for inflation and interest rates.

The economy had shown signs of slowing in inflation, activity and employment data, suggesting less pressure on prices. In its previous policy statement, the central bank projected inflation of 3.2% in early 2028, its relevant horizon for decisions. It also said the overall scale of its rate-calibration cycle would depend on new information and on bringing inflation toward its target.

BNP Paribas economists Fernanda Guardado and Laiz Carvalho said worsening inflation risks and expectations made further cuts difficult to justify. They expect the central bank to maintain a cautious, data-dependent approach. Former central bank official Sergio Goldenstein likewise expects rates to remain unchanged, citing currency depreciation, wider interest-rate spreads, uncertain fiscal prospects and the possibility of weaker inflation expectations.

Warren Rena said the latest economic indicators broadly resemble those seen in September, with more moderate activity and continued economic deceleration, while the labor market remains resilient and unemployment near its lowest levels. The firm identified the market’s reaction to the election as the main factor changing perceptions of monetary policy.

According to Warren’s Luis Felipe Vital, investors reversed some of the market moves that had reflected expectations of a Flávio Bolsonaro victory and added a risk premium amid greater concern about Brazil’s fiscal outlook. He said that premium could remain in interest-rate projections until the incoming government provides a signal about its economic plans for 2027.

BNP Paribas described financial conditions as significantly tighter than in September, particularly because of higher risk premiums. The interest-rate curve prices in a 0.75-percentage-point increase in the benchmark Selic rate before the end of 2027, while premiums on inflation-linked government bonds have also risen.

The central bank’s Focus survey, due Tuesday, is expected to show higher market inflation forecasts for 2027 to 2030 and a tighter projected path for the Selic rate. The previous median forecast had indicated a cut at this meeting and a rate of 13.5% at the end of 2026. Goldenstein said the central bank’s communication after Wednesday’s decision will be important in assessing the conditions for any eventual resumption of rate cuts.

Sources: CNN Brasil.