By Brazil Stock Guide – Brazil’s benchmark interest rate stands at 15%, but the balance of recent macroeconomic data has strengthened the case for the central bank to begin easing at its Jan. 27–28 Copom meeting, with the decision due on Jan. 28.
According to BTG Pactual, monetary policy is already operating deep in contractionary territory, creating room for an initial 25-basis-point cut in January without compromising the disinflation process. Under the bank’s baseline scenario, the Selic rate could fall by around 300 basis points by the end of 2026, reaching approximately 12%, while remaining restrictive.
Incoming data at the turn of the year have sent mixed signals. Service inflation deteriorated marginally toward the end of 2025, while the labor market surprised to the upside in November with stronger job creation and a temporary acceleration in real wages. At the same time, a broader reading of activity, credit flows and financial conditions reinforces the view that monetary tightening continues to weigh heavily on domestic demand.
Economic activity has been losing momentum since mid-2025. GDP growth slowed to just 0.1% quarter on quarter in the third quarter, and high-frequency indicators point to a mild contraction in the final quarter of the year. Despite robust gains in real household income, consumption has moderated, constrained by very tight financial conditions and a historically high share of income devoted to debt servicing. BTG maintained its GDP growth forecasts at 2.2% for 2025 and 1.7% for 2026, while flagging growing downside risks should household leverage continue to rise.
Labor market resilience, though notable, is not seen as a game changer. BTG argues that November’s stronger-than-expected employment figures were influenced by temporary factors, including public-sector hiring linked to specific events. The underlying trend remains consistent with a gradual cooling in 2026, in line with the typical lags of monetary transmission: activity and credit soften first, followed by employment, wages and, only later, services inflation.
On inflation, recent prints have been less benign, particularly in services. Core services measures accelerated in December, lifting upside risks for 2026. Even so, BTG left its headline IPCA projections unchanged at 4.1% for 2026 and 3.8% for 2027, arguing that the prospective inflation path remains compatible with a cautious calibration of policy. A first 25-bp cut would still leave the ex-ante real interest rate at an elevated level, preserving clearly restrictive monetary conditions.
Fiscal dynamics add to the picture but do not alter the conclusion. While fiscal and parafiscal stimulus is set to increase modestly in 2026, BTG expects it to fall well short of offsetting the drag from tight monetary policy. The primary balance is still projected to meet the official target, though public debt dynamics remain unfavorable — strengthening the case against keeping rates excessively high for longer than necessary.
In this context, BTG frames a January move as calibration rather than capitulation. Waiting for clearer evidence of cooling in services inflation or wage growth would risk extending the economic slowdown beyond what inflation control requires. With expectations broadly anchored and policy still restrictive even after initial easing, the trade-off increasingly favors starting the adjustment — on Jan. 28.