Financial market expectations are that BC will cut Selic by 0.25 pp
With the war in the Middle East putting pressure on fuel prices, the Monetary Policy Committee (Copom) of the Central Bank (BC) holds its second meeting of the year this Wednesday (18). Even with the rise in oil prices, market analysts believe that the committee will decide on the first interest rate reduction in two years.
Currently at 15% per year, the Selic is at its highest level since July 2006, when it was 15.25% per year. From September 2024 to June 2025, the rate was raised seven times in a row, but has not been changed in the last four meetings.
The decision on the Selic Rate will be announced early this Wednesday evening. The Copom will be absent, because the mandate of the directors of Organization of the Financial System, Renato Gomes, and of Economic Policy, Paulo Pichetti, expired at the end of 2025. President Luiz Inácio Lula da Silva will only forward the nominations for replacements to the National Congress in the coming weeks.
In the minutes of the January meeting, the Copom confirmed that it intended to start cutting the Selic in March. However, the start of the conflict between the United States, Israel and Iran cast doubt on the size of the cut, with some financial institutions even betting on postponing the interest rate reduction.
According to the most recent edition of the Focus bulletin, a weekly survey that listens to financial market analysts, the basic rate should be reduced by 0.25 percentage points, to 14.75% per year. Before the start of the conflict, expectations were at a cut of 0.5 points.
Inflation
The behavior of inflation remains unknown. The preview of official inflation, measured by the Broad National Consumer Price Index-15 (IPCA), accelerated to 0.7% in February, pressured by spending on education. However, it fell to 3.81% in 12 months, below 4% for the first time since May 2024.
According to the latest Focus bulletin, the inflation estimate for 2026 rose from 3.8% to 4.1% because of the conflict in the Middle East. This represents inflation just below the ceiling of the continuous target established by the National Monetary Council (CMN), of 3%, which could reach 4.5%, with a tolerance interval of 1.5 points.
Selic Rate
The basic interest rate is used in negotiations of public bonds issued by the National Treasury in the Special Settlement and Custody System (Selic) and serves as a reference for other rates in the economy. It is the Central Bank’s main instrument for keeping inflation under control.
The BC operates daily through open market operations – buying and selling federal public bonds – to keep the interest rate close to the value defined at the meeting.
When Copom raises the basic interest rate, it aims to contain heated demand, and this has an impact on prices because higher interest rates make credit more expensive and encourage savings.
Therefore, higher interest rates can also make it difficult for the economy to expand. But, in addition to the Selic, banks consider other factors when defining the interest charged to consumers, such as risk of default, profit and administrative expenses.
By reducing the Selic, the tendency is for credit to become cheaper, encouraging production and consumption, loosening inflation control and stimulating economic activity.
The Copom meets every 45 days. On the first day of the meeting, technical presentations are made on the evolution and prospects of the Brazilian and world economies and the behavior of the financial market. On the second day, the members of the Copom, formed by the BC board, analyze the possibilities and define the Selic.
Continuous goal
Under the new continuous target system, in force since January 2025, the inflation target that must be pursued by the BC, defined by the National Monetary Council, is 3%, with a tolerance interval of 1.5 percentage points up or down. That is, the lower limit is 1.5% and the upper limit is 4.5%.
In the continuous target model, the target is determined month by month, considering the inflation accumulated over 12 months. In March 2026, inflation since April 2025 is compared with the target and tolerance range.
In April 2026, the procedure is repeated, with calculation starting in May 2025. In this way, the verification moves over time, no longer being restricted to the closed index from December of each year.
In the latest Monetary Policy Report, released at the end of December by the Central Bank, the monetary authority maintained the forecast that the IPCA will end 2026 at 3.5%, but the estimate must be revised. The next edition of the document, which replaced the Inflation Report, will be released at the end of March.
*Brazil Agency
