Inflation surprise boosts bets on August rate cut
Helena Veronese
Ana Paula Paiva/Valor
A positive surprise in Brazil’s July mid-month inflation reading strengthened market expectations that the Central Bank will cut the Selic base rate again at the Monetary Policy Committee’s August 5 meeting. Futures rates fell sharply, while the benchmark Ibovespa stock index returned above 176,000 points on Tuesday (28).
In fixed income, the rate on the interbank deposit (DI) contract maturing in January 2029 fell to 14.25% from 14.43%, while the January 2031 contract declined to 14.46% from 14.58%. The Ibovespa gained 0.7% to close at 176,565 points after reaching an intraday high of 178,539.
The IPCA-15 consumer price index rose just 0.06% in July, well below market estimates and the lowest reading for the month since 2023. Beyond the better-than-expected headline figure, the index also showed a more favorable underlying composition, said Helena Veronese, chief economist at B.Side Investimentos.
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“This was the third consecutive IPCA reading below expectations, but the previous two did not have an overall composition as good as this one,” she said. Veronese sees a “positive outlook” for inflation in the near term, supported not only by favorable midyear seasonality but also by concrete signs of improvement.
“What could keep inflation low is economic activity. There was a fiscal boost in the first quarter, and now we will probably experience a ‘hangover’ from those stimulus measures,” she said.
Veronese even sees the possibility of deflation in August, which could prompt revisions to forecasts in the Central Bank’s Focus survey. Still, a renewed oil shock and El Niño remain important risks for the second half of the year.
August cut
From a monetary-policy standpoint, the July IPCA-15 could “validate” a cut in the Selic rate to 14% from 14.25% at next week’s Copom (Monetary Policy Commitee) meeting.
“It would make no sense not to cut with these current inflation figures,” Veronese said, given the Central Bank’s recent communication. In her view, the debate will now shift to whether the committee has room to continue lowering rates after August.
B.Side Investimentos’ base case includes two quarter-point cuts, one next week and another at one of the committee’s final three meetings of 2026. A week ago, Veronese saw upside risk to her forecast of a 13.75% Selic rate at year-end, but said the July IPCA-15 had made her “comfortable” with that projection.
Fernando Fontoura, an equity portfolio manager at Persevera Asset Management, offered a similar assessment. More important than the reading itself, he said, was that it weakened the argument that the Central Bank might pause its easing cycle next week—a move Persevera would regard as a “monetary-policy mistake.”
Equity positioning
Seeing greater upside potential for Brazilian stocks, Persevera increased its directional exposure to the local market last week.
“We thought the stock market had already found a ‘bottom’ locally. We noticed that more negative days were not causing the market to fall substantially. On the other hand, more positive days were generating a significant response, as happened today [Tuesday],” Fontoura said.
The allocation shift was also driven by light positioning among local investors, who remain deeply pessimistic.
“A lot of people are more or less ‘throwing in the towel’ and have become discouraged about the elections and the fiscal situation,” he said. “It reached a point where everyone is very underweight Brazil again. Foreign investors paused to focus on the AI theme. We have not seen any major movement, but we believe those flows could return at some point.”
Fiscal restraint
Fiscal concerns are the main reason Copom cannot cut the Selic rate more aggressively and why long-term inflation expectations continue to rise, Veronese said.
“Why don’t I forecast more cuts if inflation is beginning to slow, activity is weakening and the population is extremely indebted? Because of fiscal risk,” she said. “Even though [the Central Bank] is inclined to cut, it cannot stop worrying about the fiscal situation.”
Natalie Victal, chief economist at SulAmérica Investimentos, said declining confidence in the Central Bank itself has also affected longer-term expectations. In her view, the controversial statement accompanying Copom’s June decision triggered the de-anchoring seen in recent weeks.
“Long-term expectations do not move only because of the Central Bank. I would say they are a gauge of the credibility of the country’s economic policy as a whole,” Victal said. “But ultimately, the mandate belongs to the Central Bank, so I do think there are questions about whether it will bring inflation back to target.”
She believes the best course would be to pause the easing cycle and resume cuts once conditions are less turbulent, avoiding the risk that policymakers might have to reverse the monetary easing later.
Oil pressure
The foreign-exchange market moved separately from stocks and interest rates, with the real coming under mild pressure from another decline in oil prices.
Brent crude fell 4.83% to $84.09 a barrel, while the exchange rate per U.S. dollar rose 0.2% to R$5.12.
The real also underperformed other emerging-market currencies. Signs that the United States and Iran could revive a ceasefire agreement pushed oil prices lower and boosted risk assets. The commodity’s weakness, however, removed an important source of support for the Brazilian currency, leaving it among the session’s worst performers.
