Rising fiscal pressures, weakness for local assets and the de-anchoring of inflation expectations should prompt the Copom to keep the Selic rate unchanged at 10.50%.
The deterioration in the domestic macro and external market backdrop since the last Copom meeting on May 8 has prompted market participants to pare back their Selic rate cut expectations significantly. According to the BCB’s weekly Focus survey, analysts no longer expect any interest rate cuts at all this year, and only 100bp to follow in 2025, bringing the Selic rate to 9.50% by the end of next year. Prior to the May Copom meeting, analysts had seen the Selic rate falling to 9.50% this year and 9.0% next.
Underlying this shift has been a steady increase in inflation expectations over recent weeks. Analysts now see inflation ending this year at 3.96%, up from 3.73% prior to the previous Copom meeting, while the median inflation expectation for end-2025 has risen to 3.80%, from 3.60%. Significantly, long-run inflation expectations have also begun to de-anchor, with inflation now seen at 3.6% at the end of 2026, up from 3.5% previously.
In a series of co-ordinated speeches over recent weeks, BCB officials have highlighted the consistent worsening of inflation expectations, noting that this is a point of concern for the Board. BCB President Campos Neto said several factors have contributed to this move, including external factors, fiscal policy, monetary policy management, the central bank transition, geopolitical issues, and the recent flooding in Rio Grande do Sul. He said that for the first time in a long time, current inflation is “relatively contained, but expectations are becoming unanchored”, adding that it was important to keep the forward guidance “more open”.
