The Central Bank observed this Tuesday (10) that inflation expectations, measured by different instruments and obtained from different groups of economic agents, have risen in recent weeks and remained above the inflation target in all horizons (next years).
The information is contained in the minutes of the last meeting of the Monetary Policy Committee (Copom), held last week. At the time, the Selic cutting cycle, which had already lasted five meetings, was interrupted and the rate was kept stable at 13.75% per year. This is the highest real interest rate in the world.
"The main conclusion reached, and shared by all members of the Committee, was that, in an environment of unanchored expectations, as is the current case, a greater monetary restriction [higher interest rates] is required and for a longer period of time than would previously be appropriate", informed the BC, in the document.
In general terms, analysts considerably raised their inflation projections, reduced economic growth expectations and began to predict a higher interest rate than before. Estimates for the dollar also rose sharply.
The document was released after significant adjustments in Brazilian assets, such as the Stock Exchange index, future interest rates and the dollar, which had already shown a worsening following the confirmation that Lula will be president of the country for the next four years.
Analysts have repeatedly expressed concern about the trajectory of public accounts. They assess that successive fiscal deficits in recent years have put pressure on interest rates, and consequently, public debt. To lower interest rates and contain debt, they demand a stronger fiscal adjustment from the government.
The market has been reticent about the possibility of a large and rapid adjustment in public accounts promised in view of the commitments made to maintain social programs, to increase the minimum wage above inflation, as well as pensions, and not to promote deep cuts in areas such as health and education.
The economy's basic interest rate is the BC's main instrument to try to contain inflationary pressures, which have effects, mainly, on the poorest population.
To define interest, the institution acts based on the target system. If inflation projections are in line with targets, it is possible to lower interest rates. If they are above, the Copom tends to maintain or increase the Selic.
Since the beginning of 2025, the central inflation objective has been set at 3% and will be considered met if inflation oscillates between 1.5% and 4.5%.
When deciding the basic interest rate, the Copom mainly considers the inflation expected for the coming years, and not just the price variation observed in recent months.
This is because changes in the Selic take time to produce effects on the economy.
At this moment, for example, the monetary authority is already targeting the second quarter of 2028, a period considered the "relevant horizon" for its projections.
In statements by authorities, the Central Bank has repeated that it does not make value judgments about the government's performance in public accounts. However, he explains that he adjusts the interest rate also considering the results of fiscal policy.
If, for example, there is a deterioration in results, with account deficits and an increase in spending, incorporate this scenario into the calculation of the interest rate necessary to contain inflationary pressures and, therefore, act to converge inflation expectations to targets in subsequent years.
According to the minutes of the last Copom meeting, fiscal policy (relating to public accounts) has a short-term impact, mostly through stimulating aggregate demand, and a more structural dimension, which has the potential to affect the perception of debt sustainability and impact the forward premium of the interest curve (future rate, used by the government to roll over its debt).
"A fiscal policy that acts in a counter-cyclical manner [containing spending, for example, and aggregate demand] and contributes to the reduction of the risk premium favors the convergence of inflation to the target. The Committee reaffirms the view that the weakening of the effort for structural reforms and fiscal discipline, the increase in targeted credit and the uncertainties about the stabilization of public debt have the potential to increase the economy's neutral interest rate, with deleterious impacts on the power of monetary policy and, consequently, on the cost of disinflation in terms of activity", says the Central Bank.
The Committee further says that it "maintains the firm conviction that policies must be predictable, credible and countercyclical". "In particular, the Committee's debate reinforces, once again, the need for harmonious fiscal and monetary policies", he concludes.
