A deterioration in investor sentiment following President Luiz Inácio Lula da Silva’s re-election has increased pressure on Brazil’s Monetary Policy Committee (Copom) to halt its cycle of interest-rate cuts at its next meeting. The Selic rate stands at 13.75% a year, and many market participants have dropped their expectation of another 0.25-percentage-point reduction.

Economists cited a weaker currency, fiscal uncertainty, rising futures rates and higher oil prices as factors complicating efforts to control inflation. Former central bank president Gustavo Loyola said he now leans toward holding rates, although he has not ruled out a cut to 13.5%. He argued that the central bank has limited ability to respond to pressures beyond its control, including a less favorable international environment and expansionary fiscal measures.

Loyola said a clearer outlook would depend on the government sending signals that it intends to address public debt with structural fiscal measures. Without that, he said, monetary policy could impose costs on households and businesses without achieving its intended effect.

Former central bank director Sérgio Werlang also expects Copom to pause, giving policymakers time to assess whether changes in the exchange rate and inflation expectations are temporary or lasting. He warned that the currency could weaken further if the next administration follows the same fiscal approach as Lula’s previous term. The dollar closed at 5.447 reais on Friday, after a 9.18% weekly rise, its largest in 18 years, according to the report.

Werlang cautioned that a sharp expansion in public spending could lead to fiscal dominance, a situation in which monetary policy loses its ability to control inflation. In that case, he said, raising interest rates might not curb price growth.

Fernanda Guardado, a former central bank director and BNP Paribas’s chief economist for Latin America, said Copom should respond to the worsening inflation outlook to protect the credibility of monetary policy. She expects the inflation forecast for 2027 in the central bank’s Focus survey to exceed 5%, above the 4.5% ceiling of the target. She also pointed to potential fuel-price increases, labor-law changes and tax reform as risks.

Guardado favors keeping rates unchanged until March, when the central bank would have more information about food prices, economic activity, fiscal plans and inflation expectations. She said a lower Selic rate would not currently be consistent with bringing inflation toward the 3% target by mid-2028.

Alberto Ramos, Goldman Sachs’s director of Latin American macroeconomic research, said he saw no room for rate cuts even before the election and that the outlook has since become more difficult. He cited inflation pressures and the reduced likelihood of a credible fiscal anchor, adding that rates should remain unchanged for the next two or three meetings before policymakers reassess.

Rafaela Vitória, chief economist at Banco Inter, is among the minority expecting one more cut. She forecasts a 0.25-point reduction to 13.5%, followed by a pause at the December meeting. In her view, that rate would remain restrictive enough to absorb expected inflation shocks in early 2027.

Sources: Folha Mercado.