Standard Chartered’s Dan Pan forecast Banco Central do Brasil (BCB) will slow the easing cycle as inflation dynamics stay difficult. The Selic rate is expected to pause in Q3, before cuts resume in Q4-2026. Pan now sees the policy rate ending 2026 at 13.75%, up from a prior 12.5%, and finishing 2027 at 11.75% versus 10.0% previously.
The revised path follows rising inflation expectations, persistent core inflation and resilient domestic demand, which are judged to limit scope for near-term reductions. Further out, falling energy costs, softer demand and reduced election-related market volatility after the October 2026 elections are expected to create room for renewed easing across late 2026 and 2027. BCB last trimmed rates by 25bps on 17 June.
Outlook for Brazil’s Easing Cycle and Rate Path
We now expect a more gradual easing cycle from Brazil’s central bank, given the increasingly challenging inflation picture. The central bank’s statement following the small 25 basis point cut last week was notably hawkish, removing explicit guidance on future moves. This signals that the Selic rate is likely to remain on hold through the third quarter.
Rising inflation expectations and stubborn core inflation are the primary drivers for this view. The latest IPCA-15 inflation data showed a 0.45% month-over-month increase, keeping annual inflation stubbornly above the 3% target. Furthermore, retail sales data from May surprised to the upside, growing 0.9% and supporting the case for continued economic resilience.
Investment Implications and Risk Considerations
Given this outlook, we are positioning for the front end of Brazil’s interest rate curve to reprice higher. Derivative traders should consider paying fixed rates on short-term interest rate swaps, such as 3-month and 6-month contracts. This reflects the expectation that near-term rate cuts are now off the table.
The higher-for-longer rate environment also makes the Brazilian Real attractive for carry trades against lower-yielding currencies. With the Selic rate expected to stay elevated at 13.75% towards year-end, the yield differential provides a significant buffer. We see opportunities in being long the Real against the US Dollar.
However, we remain cautious due to the upcoming general elections in October. The door for renewed rate cuts should reopen later in the year as election-related market volatility eases. Historically, the months leading into an election have introduced significant two-way volatility into Brazilian assets, warranting prudent risk management.
