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Central Bank of Brazil's Monetary Policy Committee Sees Impact from High Interest Rates, Amid Uncertainty from US Tariff Hike

Strategic Insights

— 1 min read

The Central Bank of Brazil's Monetary Policy Committee (COPOM) has observed a clearer moderation in credit conditions, affecting interest rates, loan volumes, and increases in delinquency. However, the committee also notes that the new payroll loan program for private-sector workers is expanding more slowly than anticipated, and that the impact of changes to the financial transactions tax (IOF) is uncertain. Meanwhile, US President Donald Trump's tariff hike on Brazilian goods adds another layer of uncertainty to the already complex scenario.

Key Takeaways:

  • COPOM has observed a clearer moderation in credit conditions, including interest rates, loan volumes, and increases in delinquency.
  • The new payroll loan program for private-sector workers is expanding more slowly than anticipated.
  • The committee is monitoring the program's next phases and the impact of changes to the financial transactions tax (IOF).
  • COPOM sees signs that monetary policy is also affecting economic activity, with a subtle shift in language regarding domestic conditions.
  • The committee emphasizes that this moderation in activity is still within the bounds of its baseline forecast.
  • COPOM continues to frame the current 15% Selic rate not as the end of the tightening cycle, but as a "pause."
  • The committee acknowledges modest progress in inflation expectations, but notes that improvements remain insufficient.
  • COPOM attributes the drop in short-term inflation expectations to recent data releases, and downplays the relevance of declining implicit inflation rates embedded in financial instruments.
  • The overall takeaway is that monetary policy is having the intended effect, but inflation risks could still push rates higher.
  • One possibility is a major fiscal expansion by President Luiz Inácio Lula da Silva to counteract a slowing economy.
  • A more clearly defined risk is the external shock triggered by Trump's tariffs, as well as the uncertainties around his fiscal and economic agenda—and how the U.S. Federal Reserve might respond.

Statistics:

  • 15%: the current Selic rate, described as a "pause" by COPOM.
  • 3%: the Central Bank's inflation target.
  • 3.4%: the inflation forecast using the Focus survey baseline for Q1 2027, above the inflation target.
  • February 2026: the expected start of rate cuts, according to markets.

Sources:

  • Brazil Central Bank's Monetary Policy Committee
  • "Minutes from the latest meeting"
  • Source: Brazil Central Bank's Monetary Policy Committee
  • "Focus survey baseline"

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