The war in the Middle East has turned the scenarios projected by the market for 2026 upside down. And it is in the midst of a time of estimate revisions that the BC (Central Bank) and the Fed (Federal Reserve System) begin their respective monetary policy meetings this Tuesday (28).
Market expectations revolve around a milder cut than previously expected here, of 0.25 points, taking the Selic to 14.5% per year; and maintenance of interest rates in the United States.
“The Copom will meet again on April 28th and 29th, with a backdrop of very high uncertainty about the resolution of the war in the Middle East. Since its last meeting, the committee has seen significant appreciation of the real, driven both by terms of trade (given the rise in oil prices) and by the continued inflow of external capital flows, especially into the Brazilian stock market”, says a report from Itaú BBA this Monday (27).
“On the other hand, current inflation data brought important surprises and market expectations for the IPCA rose significantly (consuming part of the existing budget to reduce the Selic rate, by mechanically moving real interest rates downwards).”
Deliberations take place between this and the next day, so that decisions on interest rates will be announced on Wednesday (29).
At the beginning of April, a report from Itaú BBA already warned that .
This cautious position on the part of the market is reflected in the projections and positions created by investors.
On February 27, one day before the conflict broke out, 66% of the market was betting on a 0.5 percentage point cut at this meeting, according to the Copom (Monetary Policy Committee) option contracts negotiated at B3. Another 23% predicted a cut of 0.75 points, while 3% believed in a drop of 1 point. 3.5% were those who paid a 0.25 cut.
Since then, the scenario has changed: on Friday (24), the last day with information available until the publication of the article, 86.35% of investors placed their chips at the mildest reduction, of 0.25 points. Another 10.5% even believe in maintaining the rate as it is. Less than 3% predicted larger cuts.
HSBC previously predicted a 0.5 point cut at this meeting, and started working with the vision of a more cautious monetary policy after the last Copom meeting.
“Exceptionally high global oil prices, uncertainty surrounding the resumption of shipping through the Strait of Hormuz, and the absence of a lasting resolution to the conflict support this change in our outlook for short-term rates. Since the last meeting, the yield curve has moved due to Middle East-related news, but pricing for the April 29 decision has remained relatively stable,” writes the head of Brazil Economics Research to HSBC, Daniel Lavarda.
The economist highlights the cautious stance emphasized by the Copom to “navigate through this period of great uncertainty”.
“As the BCB noted, the pace of further cuts — and the overall magnitude of the easing process — will critically depend on ‘new information that increases clarity about the depth and extent of conflicts in the Middle East,'” says Lavarda, noting that little progress has been seen in negotiations on the conflict.
Until the end of March, the Selic base rate was at the highest level in two decades. , the BC’s monetary policy started to operate at a rate of 14.75% per year.
The team of Research from XP highlights that “the flow of data and news since the last Copom meeting has increased the risks for the inflation scenario”.
“Oil prices remain under pressure, the IPCA and its core measures rose, medium-term inflationary expectations deteriorated and domestic activity regained traction. The appreciation of the exchange rate has been acting as a ‘shock absorber'”, says the XP report.
Inflationary shock
XP warns that “rising medium-term expectations require additional caution”, highlighting that “inflationary shocks are more worrying in an economy without idleness”.
“Inflation will remain under pressure this year due to the increase in global energy costs, stimulus to domestic demand and possibly adverse weather conditions. The exchange rate appreciation only mitigates these pressures”, indicates the house’s report.
“In particular, in the case of supply shocks, the economic literature recommends that central banks accommodate the primary inflationary effect and act on the second-round effects — that is, the transfers to prices not directly affected. In the current context of a positive output gap, the probability of these secondary effects increases”, he points out.
In this sense, Itaú assesses that Copom’s inflation projections should rise to 4.4% in 2026 (compared to 3.9% previously) and increase to 3.4% in the relevant horizon — a future period that the BC takes as a reference for its monetary policy decisions.
Thus, the deterioration of inflation expectations and the resilience of economic activity led the Research from Goldman Sachs to raise its Selic rate projection to 13.25% at the end of 2026, an increase of 0.25 points.
“In the face of a more prolonged and deeper oil shock, the balance between monetary policies could become more complex, with the focus potentially shifting from inflation to growth,” says the North American investment bank in a note.
Interest trajectory in Brazil
Calculated by the BC itself, the Focus bulletin points out that the market’s median expectation is for a cut of 0.25 points at this meeting.
The research also draws attention to the fact that, although investors see room for further interest rate cuts throughout the year, expectations have deteriorated, with the market increasingly seeing the country’s basic interest rates at a higher level than previously expected.
XP projects the Selic rate at 13.5% at the end of the year, expecting, in the wake of this week’s cut, two reductions of 0.5 points in June and August, “as tensions in the Middle East dissipate”.
US scenario
The CME Fedwatch tool points out that 100% of the market expects interest rates to be maintained in the US.
Inflation remains under pressure, and the effects of the war in the Middle East only put more pressure on the Fed, according to William Castro Alves, chief strategist at Avenue.
“March data has already shown a major impact [da guerra]: the impact of energy, on prices of gasoline, diesel and energy in general, which also generates effects on other products and other services. So, if the inflationary scenario was already somewhat tight, that is, reducing the possibility of interest rate cuts, the conflict in the Middle East only exacerbates this”, points out Castro Alves.
This should be Jerome Powell’s last meeting at the head of the Fed. The current chairman of the US central bank was appointed by Donald Trump in his first term, and was kept in charge by Democrat Joe Biden.
This is a time of pressure: Trump has been attacking the Federal Reserve for maintaining a restrictive monetary policy, while .
Former Fed director Kevin Warsh, appointed by Trump as president of the US Central Bank, but left open his opinion regarding the trajectory of interest rates and stated that he is “skeptical” about the future guidance of the US Central Bank.
But the war scenario has made even critics of high interest rates rethink the Fed’s position, such as United States Treasury Secretary Scott Bessent, who argued that as the conflict continues.
“Do I think rates should be reduced? Eventually. I think now we have to wait and see,” Bessent told Semafor, adding that in the midst of the war, the Fed is “doing the right thing by watching and waiting.”
“The tone of the last statement under Jerome Powell’s presidency is expected to be cautious, indicating a longer pause. Powell should use his space at the press conference to reinforce his achievements in the chair and recall that he considers current monetary policy to be in territory between neutral and slightly restrictive, reducing the space for new aggressive cuts”, observes Paula Zogbi, chief strategist at Nomad.
