The Brazilian financial market has undergone a significant shift in expectations regarding the trajectory of interest rates ahead of the Central Bank's Monetary Policy Committee (Copom) meeting scheduled for November 4. Following the second round of elections and President Lula's victory, combined with internal and external inflationary risks, economic agents have largely abandoned the previous consensus favoring a rate cut. Instead, major banks and brokerages now anticipate a decision to maintain the Selic rate at its current level of 13.75% per year.
This reversal is clearly reflected in Copom options traded on B3, Brazil's stock exchange. Prior to the election results, the probability of a 0.25 percentage point cut in November exceeded 70%. Post-election data indicates an implied probability of 68.8% for maintaining the benchmark rate. These options, derived from negotiated contract prices, highlight the weight of the electoral outcome on market projection models.
Itaú Unibanco projects a unanimous decision to hold rates, expecting the committee to signal a gradual moderation in economic activity without characterizing it as resilient. The bank anticipates that the Copom will acknowledge a widening gap between inflation expectations and the target, citing adverse global conditions and elevated risks around the baseline scenario. Similarly, HSBC forecasts the Selic rate will remain at 13.75% through March 2027. The bank emphasizes the critical nature of public accounts, noting that clear measures to contain public spending are unlikely before the November and December meetings. Consequently, inflation risks have risen due to higher energy and food prices, growing fuel subsidy costs, and potential impacts from a shorter work week.
HSBC has revised its projections downward for economic growth, expecting GDP to finish 2026 at 1.6% and drop to 0.6% in 2027. Inflation is projected to end 2026 at 5.1% and 5% in 2027. The bank warns that the primary risk lies in the de-anchoring of inflation expectations, which could lead market participants to question the Central Bank's commitment to its target amidst high fiscal uncertainty.
External pressures further complicate the scenario, with ongoing conflicts in Ukraine and Iran driving up oil and fuel prices. Itaú BBA notes that the international environment has shifted from uncertain to adverse. The war in the Middle East appears more protracted, and despite increased oil exports, higher freight costs, insurance premiums, and risk premiums have kept commodity prices near conflict-start levels.
Felipe Salles, chief economist at C6 Bank, argues that the Central Bank adopted a cautious stance in September and must now persevere with contractionary monetary policy. He points to deteriorating projections in the Focus bulletin for inflation, exchange rates, and the Selic rate since the last meeting. Salles believes inflation forecasts for the relevant horizon will rise above the target, recommending caution due to de-anchored expectations and asset price volatility. His projection aligns with maintaining the Selic at 13.75% through 2027.
BTG Pactual also supports a hold on interest rates, citing the deterioration of the scenario and increased asset volatility as reasons for a prudent interruption of the rate-cutting cycle. The bank suggests the Central Bank may keep the Selic constant to accumulate information regarding fiscal policy and its effects on prices and expectations. In an environment of such magnitude uncertainty, they argue that waiting for greater clarity is the most sensible approach.
However, not all institutions agree on a hold. Inter expects another 0.25 percentage point cut in November but anticipates a pause in the calibration cycle by December. The bank argues that a Selic rate of 13.50% remains restrictive enough to cushion expected inflationary shocks in early 2027, though they see no room for continued cuts immediately. Inter forecasts inflation could reach 6% over a 12-month period by February, driven by exchange rate appreciation, the removal of gasoline subsidies, the end of the 6x1 scale, and the implementation of VAT in 2027.
ASA acknowledges a significant increase in the probability of maintaining rates due to currency depreciation and fiscal uncertainty but still predicts a 0.25 percentage point reduction on November 4. They believe that economic slowdown and inflation projections remaining near the target support this final cut, though they expect the Copom to adopt a cautious tone and signal a pause in December.
Rafael Cardoso, chief economist at Daycoval, also expects another cut, citing slowing economic activity and previous Central Bank communications revising projections downward. He views the 0.25 percentage point move as having minimal practical impact, serving more as a signal of continuity rather than a substantive policy shift. Cardoso emphasizes that the content of the Central Bank's communication will be more critical than the decision itself, noting that a well-justified cut with conservative future signaling would be well-received by the market.
Sources: CNN Brasil.