Brazil’s debate over interest rates has become increasingly heated, with arguments over monetary policy mixed with political and ideological disputes. A rumor that President Lula might appoint a group of heterodox voices to the Central Bank alongside Gabriel Galípolo has added to market concern, according to columnist Vinicius Torres Freire.

The Central Bank kept the Selic rate at 13.75% at its Wednesday meeting. Some major banks expect it to remain unchanged until the middle or end of next year. Freire writes that the bank may face particular pressure if it does not cut rates at its next three meetings before March 2027, or if economic growth slows further.

The outlook is difficult for policymakers. The Selic is already at a restrictive level, while the economy is losing momentum. At the same time, investors expect higher inflation and are demanding greater compensation, and uncertainty remains over Lula’s fiscal plans and their potential effects on the currency and inflation expectations.

Freire also points to unresolved questions about interest rates in major economies and oil prices. The Central Bank described the situation as involving a significant increase in uncertainty around its baseline outlook. Financial conditions—including market borrowing costs, exchange rates and risk premiums—have tightened, and interest rates on debt with maturities beyond two years are near levels reached during the market panic of January 2025.

Cutting the Selic too aggressively could push longer-term rates and the dollar higher, with a possible knock-on effect on inflation, the column argues. Any easing in financial conditions is likely to be gradual and uncertain, and would also depend on the strictness of the government’s fiscal program and how effectively it is carried out.

Freire expects no major shift in fiscal policy or institutional changes that would substantially improve the outlook. In his assessment, even a workable adjustment to the government’s existing approach is unlikely to bring significant relief to financial conditions.

Sources: Folha Mercado.