Brazil central bank cuts Selic to 14% as inflation cools

Brazil's central bank cut its benchmark Selic rate by 25 basis points to 14% Wednesday, extending cumulative easing since March to 100 basis points as inflation cooled more than expected and economic growth moderated.

"The full impact of tight policy has not shown up yet," the monetary committee, known as Copom, said in its statement, adding that uncertainty around its inflation projections remains higher than usual. Board members led by Governor Gabriel Galípolo voted unanimously for the cut, matching the forecast of all economists surveyed by Bloomberg.

The decision follows an early-July inflation reading that came in below forecasts, with private forecasters trimming their 2026 inflation projection to 5.03 percent — a fifth straight weekly decline. That remains well above the official 3 percent target, and analysts now pencil in a 13.75 percent Selic for the end of 2026, down from an earlier 14 percent estimate.

The path beyond Wednesday is uncertain. President Luiz Inácio Lula da Silva is pushing to broaden social programs ahead of October elections, while volatile energy costs could renew upward pressure on prices. Analysts project the Selic will stay in double digits for years — 12 percent by end-2027, 10.5 percent by end-2028 and 10 percent by end-2029 — a horizon that shows how far above target inflation remains.

Easing Cycle Extends to 100 Basis Points

The central bank has moved cautiously, tying each decision to the latest inflation data. High interest rates have restrained household consumption and cooled the labor market, yet price growth remains well above the 3 percent target. Even after four straight cuts, the Selic at 14 percent still leaves real interest rates strongly positive against the 5.03 percent inflation forecast for 2026.

The tightening that preceded this easing pushed the Selic to a peak before Copom began cutting in March, and the full effect of that policy is still feeding through, with consumer spending subdued and the labor market cooling, according to the central bank's own assessment. The easing has begun to feed through to markets: lower borrowing costs reduce financing pressure on Brazilian corporations and consumers, a supportive backdrop for equities, while the real could weaken as the rate differential with the U.S. narrows.

What Comes Next Hinges on Data

Copom has shown no urgency to return to more neutral settings, with the full effect of earlier tightening still feeding through. Lula's extra spending initiatives and the potential for renewed energy-price spikes could keep upward pressure on prices, reinforcing the gradual approach. Forecasters' long-run path keeps the Selic at double-digit levels until at least the end of 2028, indicating little scope for aggressive cuts while inflation remains near 5 percent.

The next Copom meeting will determine whether the easing cycle continues at the same pace or slows. With the 2026 inflation projection still nearly two points above target, policymakers are likely to keep cutting in quarter-point steps, leaving borrowing costs elevated for years to come.

This article is for informational purposes only and does not constitute investment advice.