Selic Rate Higher For Longer

UBS expects the Brazilian Central Bank to maintain high interest rates for longer as resilient domestic growth and unanchored inflation expectations hinder progress toward the 3% target. Despite a restrictive Selic rate, fiscal and credit stimuli continue to buoy aggregate demand, necessitating a sustained tightening stance.

Key Takeaways

• 1.The Brazilian economy is resilient, supported by fiscal and credit stimuli, making the current monetary easing cycle likely to end soon.
• 2.Inflation expectations have de-anchored, with 2026, 2027, and 2028 targets consistently above the 3% target center.
• 3.Services inflation is the primary challenge, reflecting internal demand pressures and rigid labor costs rather than external shocks.

Table of Contents

• Resilient growth, unanchored expectations, and inflationary risks warrant additional caution
• Resilient growth limits the room for further cuts
• Services inflation remains the main challenge
• The de-anchoring of expectations continues to advance
• The balance of risks remains skewed to the upside
• Communication and credibility matter more when expectations are unanchored
• Higher interest rates for longer