Data show factors that are countering the expected impacts of contractionary monetary policy
The Brazilian economy has shown signs of slowing down, as occurred with GDP in the third quarter, with a variation of 0.1%. Now, the IBCBr registered a decline of 0.2% in October compared to September, the same decline as the previous month. But this movement of loss of pace in activity still shows contradictory data. Retail sales also rose 0.5% in October. The first most significant positive change in several months, while the services sector, despite the slowdown, still advanced 0.3% in the month. Different from the composition of IBCBr, where Services fell 0.2%.
These data, in fact, show factors that are counteracting the expected impacts of contractionary monetary policy. Interest rates kept high for a prolonged period of time should cause a loss of a more consistent pace in the economy. It is the strategy to cool demand and, therefore, reduce the space for price increases. Inflation is also falling, as are projections. In the Focus report, released this Monday, the IPCA forecast for 2025 fell from 4.40% to 4.36%; and that of 2026 from 4.16% to 4.10%. They are converging towards the center of the inflation target, which is 3%. However, this convergence still appears very gradual. The average market projection for inflation in 2027 remained at 3.8% and for 2028, at 3.5%.
Of course, the trend towards a loss of pace in activity along with inflation reinforces the expectation regarding a cut in the Selic rate at the beginning of 2026. The problem is the contradictory data. The expansion of sales in commerce, services (which still show resilience due to price increases), the strength of the labor market, government income transfer programs are present conditions, which reduce the impact of monetary policy and can maintain the conservatism of the Central Bank in managing interest rates.
And 2026 will be an election year, in which, normally, there will be an increase in public spending, greater market instability due to political factors (we have already had a sample with the recent nomination of Flávio Bolsonaro as a pre-candidate for the Presidency). The more volatile dollar can affect the evolution of various prices. At the beginning of the year there will already be some impact on the income available for consumption, with the increase in the Income Tax exemption range. Finally, more doubts regarding the evolution of activity and possible new price pressures.
The Copom, in the minutes to be released this Tuesday, may even soften the harsher tone of the statement from last week’s meeting. But it is highly unlikely that it will provide a safer indication regarding the start of Selic cuts. And we cannot talk about a lack of transparency. The Central Bank Committee has been very transparent regarding doubts regarding the slowdown in the economy and inflation and the objective of ensuring greater convergence of inflation projections towards the target. Given that, for now. It is only possible to predict gradualism in interest rate cuts.
*This text does not necessarily reflect the opinion of Jovem Pan.
