Selic expectations dip slightly, challenging COPOM’s strategy

According to data released Monday by the Central Bank, the median forecast for the Selic rate at the end of 2025 fell from 15% to 14.75% per year.

While the revision is minor and unlikely to significantly impact the Central Bank’s inflation projections at this week’s monetary policy committee (COPOM) meeting, it could mark the beginning of a broader reassessment of the expected intensity of monetary tightening—a shift that may complicate the committee’s goal of gradually bringing inflation back to its 3% target.

Two main factors drove the lowered Selic projection. First, fewer economists now expect the benchmark rate—currently at 14.25%—to peak at 15% or more during this cycle.

The median forecast points to a 0.5 percentage point hike at this week’s Copom meeting, followed by a smaller 0.25 point increase in June. But a growing number of analysts believe the tightening will end at 14.75%.

This is reflected in the average forecast for the June meeting, which dipped from 15.06% to 14.91%. Broadly, about one-third of analysts now believe the cycle will stop short of the 15% mark. A separate survey by Valor indicates that just under half of respondents expect the Selic to remain below 15%.

A second Central Bank report—tracking the distribution of inflation expectations—also points to fading expectations of a more aggressive rate hike cycle. The share of analysts forecasting rates above 15% in 2025 dropped from 36.7% in March to 16.4% in April.

The second factor weighing on year-end Selic forecasts is a growing belief that rate cuts might begin before the end of the year.

According to the median projection, the Selic would hold steady at 15% through the COPOM meetings in July, September, and November—then fall by 0.25 percentage point in December. This was the main new element in this week’s Focus report.

Market expectations for the year-end Selic are significant because they feed into the Central Bank’s inflation forecasting models. Although the updated forecasts show lower rates than those used in the last Copom meeting, the difference is not dramatic.

Previously, economists expected the Central Bank to begin easing in January 2026, starting with a 0.25 percentage point cut, followed by another of the same size. The Focus survey now anticipates one 0.25-point cut in December, but leaves the pace of easing for 2026 unchanged—still notably cautious.

The Focus distribution map supports this trend. The share of analysts projecting year-end Selic rates of 14.25% or lower rose from 5.7% in February to 9.4% in March and 14.3% in April.

This downward shift in rate expectations doesn’t materially change the outlook for real interest rates, which are expected to remain tight.

The average Selic rate across the eight COPOM meetings in 2026 is projected at 13.31%, compared to an expected inflation rate of 4.51%. For December 2026, the Selic is forecast at 12%, versus an inflation estimate of 4% for 2027.

If inflation expectations remain stable, this implies a real interest rate between 8% and 9% through the end of 2026—a restrictive level consistent with efforts to bring inflation back to target. The neutral real rate is estimated between 5% and 7%, depending on analysts’ outlook.

Since the March meeting, COPOM has emphasized that maintaining a sufficiently tight rate for long enough is just as important as reaching that restrictive level in the first place.

To enforce this stance, the Central Bank will need to counteract the market’s natural tendency to price in early rate cuts.