Overview
Bank of America analysts expect Brazil's central bank to cut the Selic policy rate by 25 basis points to 14.50% at the upcoming Copom meeting, despite a less favorable economic backdrop compared with the March decision. The central bank began what it described as a "calibration" easing cycle in March, and BofA sees another step lower even as inflation dynamics and external pressures have deteriorated.
Inflation trajectory
Headline IPCA inflation has risen since February, moving from 3.8% to 4.5% in mid-April. Core inflation has also increased, reaching 4.9% from 4.3%. On a momentum basis, core services inflation registered 5.3%. Median expectations for 12-month-ahead IPCA sit at 4.17%, while implied inflation has risen to around 5.8% amid higher oil prices.
Activity and demand indicators
Recent activity data suggest momentum has cooled. Seasonally adjusted retail sales in February were 0.6% month-over-month, under the 0.9% forecast. Services expanded 0.1% in the same month, missing the 0.5% expectation. Industrial production grew 0.9%, in line with consensus, but that represented a slowdown from January's 2.1% pace.
External and financial environment
Geopolitical tensions in the Middle East have clouded the external outlook, amplifying uncertainty around energy prices and global supply chains. At the same time, the Brazilian real has strengthened by roughly 8.5% year-to-date, making it one of the market's preferred assets. That currency appreciation helps create space for additional policy easing and can limit second-round inflation effects from higher oil costs.
Policy outlook and forecasts
BofA expects the Copom to shift the relevant monetary policy horizon to the fourth quarter of 2027 while keeping a cautious tone. The analysts project the policy rate will fall further to 13.25% by the end of 2026. Financial conditions remain tight overall but have eased slightly since the prior meeting, driven in part by lower risk perception and continued currency appreciation.
Implications
The mix of higher core inflation and an appreciating real presents competing forces for policymakers: currency strength supports easing, while persistent core services inflation and oil-driven implied inflation argue for caution. The trajectory BofA outlines implies a gradual easing path conditioned on how these dynamics evolve.
Key points
- Bank of America expects a 25 basis point Selic cut to 14.50% at the next Copom meeting.
- Inflation measures have worsened since March - headline IPCA rose to 4.5% and core inflation to 4.9%, with implied inflation near 5.8% on higher oil prices.
- The Brazilian real's roughly 8.5% year-to-date appreciation and slightly looser financial conditions provide room for further easing.
Risks and uncertainties
- Rising oil prices and geopolitical tensions in the Middle East could push implied inflation higher, affecting energy-exposed sectors such as transport and logistics.
- Persistently elevated core services inflation, recorded at 5.3% on a momentum basis, may limit the central bank's ability to quickly resume easing without risking second-round inflation effects.
- Slowing domestic activity indicators - weaker retail sales and subdued services growth - create uncertainty about demand-driven disinflation and the timing of further rate reductions.
Note: This article reports expectations and data points presented by Bank of America analysts and summarizes recent official inflation and activity releases.