Analysis: Brazil’s car tax breaks enter a new chapter

New Selective Tax rules extend benefits to certified sustainable vehicles, continuing a long-standing pattern of incentives for the auto industry

 

 

 

In Brazil, tax breaks have historically been granted to cars purchased by people with disabilities, professional drivers such as taxi operators, and other groups—the latter category often linked to programs negotiated between the government and automakers. This time, the provisional presidential decree No. 1,399/2026, published on Wednesday (4) and addressing the excise (or the Selective Tax), includes vehicles with a sustainable-version certification issued by the Ministry of Development, Industry, Trade and Services (MDIC).

The sustainable-version certification is tied to the Sustainable Car program, launched in July 2025. The initiative, which exempted a list of models from the Industrialized Products Tax (IPI), was created with an environmental goal in mind. It granted tax exemptions to cars with low pollutant emissions and a high proportion of recyclable materials. In practice, however, it was designed to boost sales at a time when the market was sluggish.

lthough electric cars also produce low emissions, they were excluded because the program was limited to vehicles manufactured in Brazil. No electric cars were being produced in the country at the time, and under the program’s criteria, even models that are now imported in semi-knockdown (SKD) form for final finishing in Brazil remain ineligible. In other words, all Chinese models were excluded. The measure prompted complaints at the time from EV brand representatives.

The program initially covered a limited number of models—mostly smaller, lower-priced cars. Following lobbying efforts by automakers in Brasília, the list was subsequently expanded to include additional configurations and models launched after the program was created.

The list of eligible vehicles now includes 14 versions of the Chevrolet Onix, Fiat Mobi, Fiat Argo, Citroën C3, Hyundai HB20, Renault Kwid, Volkswagen Polo, and Volkswagen Tera. With the IPI exemption, these models—whose entry-level versions are priced at around R$70,000, although higher-end trims can cost considerably more—received discounts ranging from R$3,000 to as much as R$13,000.

The addition of new models was even announced by Geraldo Alckmin, the vice president and then head of the MDIC, on his Facebook account. Alckmin is one of the program’s strongest supporters. After its launch, he began visiting car dealerships on Saturdays to monitor sales performance.

The program did, in fact, attract consumers. According to the National Association of Vehicle Manufacturers (Anfavea), sales of eligible models rose 28.9% from January to September. Over the same period, the market for passenger cars and light commercial vehicles grew 16.6%.

The market expansion prompted Anfavea to revise its full-year projections. In 2026, sales of new vehicles are expected to exceed 3 million units for the first time in 14 years.

Car rental companies benefited from the program as well, and to a greater extent than end consumers. Anfavea data show that of the 374,000 eligible vehicles sold from January to September, 277,000 were sold through direct sales and 97,000 through retail channels.

Over the years, the automotive industry’s tax system has been shaped by rules tailored to specific types of vehicles. These rules have also almost invariably been followed by expansions of the lists of eligible products. In some cases, automakers have even adapted product development and launch plans to ensure their vehicles qualify.

The best-known example was the economy car program. It was launched in 1993 after then-President Itamar Franco asked Volkswagen executives to bring back the Beetle. In return, he would grant the model an IPI exemption.

Volkswagen promptly agreed to the president’s request. Itamar Franco, an honored guest at the relaunch celebration, rode in a convertible Beetle, echoing Juscelino Kubitschek’s appearance at the inauguration of Volkswagen’s factory in São Bernardo do Campo in 1959.

What followed, however, was an intense, prolonged lobbying effort by all automakers to have their own models included in the tax benefit. Legislation was then introduced for economy cars, exempting not only the Beetle but also vehicles equipped with 1.0-liter engines from the IPI.

In the next phase, automakers adapted their new models to fit the category, eventually expanding the list of IPI-exempt vehicles far beyond the original idea of a bare-bones, no-frills car. The industry then came up with the 1.0-liter turbo engine, demonstrating that when tax breaks are at stake, automakers can learn—and do—just about anything.

Brazil’s car tax breaks reflect decades of automakers’ influence on policy — Foto: Pixabay
Brazil’s car tax breaks reflect decades of automakers’ influence on policy — Photo: Pixabay

*By Marli Olmos, Valor — São Paulo
Source: Valor International
https://valorinternational.globo.com/

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Industrial trade group lobbies Senate to lower CBS tax rate

National Confederation of Industry says 11.3% rate set by Federal Court of Accounts for Goods and Services Contribution is too high

 

 

The National Confederation of Industry (CNI) criticized the 11.3% rate set for the Contribution on Goods and Services (CBS), which is scheduled to take effect in January 2027, saying it is higher than necessary to maintain the current rate. The organization argued that the Senate should discuss lowering it to prevent additional costs for businesses.

The Federal Court of Accounts (TCU) announced that the benchmark rate for the tax would be 11.3%. The CNI acknowledged the unprecedented assistance provided by the court in setting the rate, but believes the figure is higher than necessary to maintain the tax rate

“Further discussion is needed to determine the final rate, which will be set by the Senate by December 15,” the CNI said in a statement.

In the confederation’s view, the Senate’s review must “weigh political and technical considerations,” drawing on TCU’s study, and “strike a balance between the expectations of consumers and those of productive sectors.”

The confederation said the tax rate already is above the threshold appropriate for a developing country and warned against the “shortsighted view that there are no limits to imposing new costs on consumers.”

If senators do not approve the rate by December 15, the figure set by the TCU will take effect.

The tax reform replaces the Social Integration Program (PIS), the Contribution for the Financing of Social Security (Cofins), the Tax on the Circulation of Goods and Services (ICMS) and the Tax on Services (ISS). It also reduces the rate of the Tax on Industrialized Products (IPI) to zero for most products. The reform creates the CBS and the Tax on Goods and Services (IBS) to replace these levies.

According to CNI, TCU’s projection was based on the average tax rate from 2012 to 2021. However, PIS-Cofins revenue was boosted because ICMS and ISS were included in its calculation base. As a result, the tax rate calculated by the court is higher than what would have been reached, according to the CNI, had a more recent reference period been used.

“From a technical standpoint, the need for further discussions is justified by the nature of projection exercises, which are subject to variables involving a range of uncertainties,” the CNI said.

In the confederation’s view, discrepancies in the projections may stem from variables such as the reduction in tax evasion expected from the reform, the discount applied to public-sector purchases, and assumptions about revenue from the Selective Tax and the residual IPI.

CNI said current tax rate already is above the threshold appropriate for a developing country — Foto: Pixabay
CNI said current tax rate already is above the threshold appropriate for a developing country — Photo: Pixabay

*By Hamilton Ferrari— Brasília
Source: Valor International
https://valorinternational.globo.com/

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Under pressure, Lula calls for fiscal responsibility to draw foreign capital

Statement comes after meeting with former ministers and economists close to the president to discuss economic guidelines for his fourth term

 

 

 

Finance Minister Dario Durigan says no concrete measures have been discussed so far — Foto: Reprodução/GloboNews

Finance Minister Dario Durigan says no concrete measures have been discussed so far — Photo: Reprodução/GloboNews

President Luiz Inácio Lula da Silva said Thursday (5) that fiscal and legal responsibility are necessary to attract foreign investment to Brazil. Amid growing market concerns over fiscal policy, he made the remarks just hours after meeting with Vice President Geraldo Alckmin, ministers, former ministers, and economists close to him.

“We must have legal responsibility and fiscal responsibility. That is why we cannot treat partnerships as a game,” he said during the first meeting of the National Council for the Industrialization of Critical and Strategic Minerals (Cimce), at the Planalto Palace. “We know that, to attract investment, we need to have our economy in order. People want to know whether we are serious.”

Earlier in the day, at the Alvorada Palace, Lula met with former Finance ministers Fernando Haddad and Guido Mantega; Alckmin; Finance Minister Dario Durigan; Planning and Budget Minister Bruno Moretti; Chief of Staff Miriam Belchior; Management and Public Service Innovation Minister Esther Dweck; Brazilian Development bank (BNDES) President Aloizio Mercadante; and former BNDES president Luciano Coutinho.

Also in attendance were economists Laura Carvalho, a professor at the University of São Paulo (USP) and an associate researcher at the Brazilian Institute of Economics of the Getulio Vargas Foundation (FGV Ibre), and Eduardo Moreira, founder of news portal ICL. The meeting participants are economists with heterodox views. Further meetings with civil society and different sectors of the market will be held, Durigan said.

“There was no discussion of specific measures, and this is not yet the time to address any specific measures,” the minister told reporters after the meeting, adding that participants agreed on their assessment of the economy and the paths to be followed in the coming years. He did not confirm, however, whether the federal government intends to submit proposals to the National Congress this year.

The gross general government debt (DBGG) reached 82.9% of GDP in recent months, more than 10 percentage points higher than at the start of Lula’s third term, and projections continue to point to further increases in the coming years. The central government’s 12-month cumulative primary deficit stands at R$49.5 billion, or 0.38% of gross domestic product (GDP).

Proposals under way

 

Despite the lack of concrete proposals at the meeting, it marked the first step toward defining measures that could be adopted. Until now, discussions with the president had focused on trying to convince him of the need to adjust public finances. But Lula has shown little urgency in moving forward with the issue, according to government sources who spoke to Valor.

The proposals are expected to be presented to the president after he returns from trips to Turkey and the Philippines next week, Durigan said. The finance minister and Moretti will be responsible for organizing suggestions based on the meeting’s discussions. According to government sources, both had already been working on assessing possible measures, discussing their effects individually and seeking to identify alternatives that Lula might accept.

The challenge is to find a middle ground that improves the trajectory of public finances without imposing losses on the population or undermining social programs, measures to which Lula has shown resistance. Economic officials, however, believe it is important to make progress on structural changes to public spending, particularly mandatory expenditures, which are on an upward trajectory and put pressure on the budget, making it harder to stabilize public debt.

Proposals discussed so far, such as using the midpoint of the fiscal target as the benchmark for budget freezes and allowing mandatory spending to be frozen, are considered important to give budget management some breathing room. Public finance experts, however, believe these measures must be accompanied by more far-reaching changes to send a consistent signal that public finances are sustainable. There is still no agreement on which measures Lula will be willing to accept.

Defining these measures also hinges on the president’s political priorities. Until now, Lula had been less focused on fiscal discussions and more concerned with responding to what he interpreted during the second round of the elections as a public desire for changes in the way the government operates, expressed above all in the streets and through mobilization on social media. Government sources say Lula’s political timetable differs from that of the economic team, requiring caution in presenting proposals.

In this context, ministers have adopted an approach described as almost “educational” to explain to the president why spending needs to be reviewed. Their argument is that public spending will have to be “rationalized” to ensure the sustainability and continuity of social programs. In their conversations, they have avoided even using the expression “fiscal adjustment.”

Among the spending “rationalization” measures under consideration is the possibility of creating greater coordination between the constitutionally mandated minimum spending levels for health and education, allowing states and municipalities to adjust some expenditures to their demographic needs.

On the revenue side, discussions continue over taxing securities such as Real Estate Credit Bills (LCIs) and Agribusiness Credit Bills (LCAs). One faction within the government argues that the tax should be levied through the income tax system, which would require debate in Congress, rather than through the Tax on Financial Transactions (IOF), on the grounds that the latter would be poorly received by financial markets.

Also under discussion is strengthening the agenda to combat special privileges, particularly excessive salaries in the judiciary, military pension benefits and congressional budget amendments. In his remarks after the meeting, Durigan said topics discussed included improving fiscal results, the quality of public spending, interest rates, international pressures on fuel prices and the cost of living for the population.

Asked about changing the parameters of the fiscal framework, the minister declined to disclose any decisions in advance. He said, however, that the government wants to move toward primary surpluses in the coming years by reinforcing the current fiscal rules. The primary balance targets in the Budget Guidelines Bill are surpluses of 0.5% of GDP in 2027, 1% in 2028, 1.25% in 2029 and 1.5% in 2030.

*By Giordanna Neves, Lu Aiko Otta, Mariana Andrade and Lucas Teixeira — Brasília

Source: Valor International

https://valorinternational.globo.com/

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Trump’s defeat in midterms opens door to moderate right in Brazil, experts say

Political scientists say Bolsonaro family remains a leading political force despite setback for U.S. president

 

 

Donald Trump met Eduardo Bolsonaro, Flávio, and Paulo Figueiredo in May at the White House
Donald Trump met Eduardo Bolsonaro, Flávio, and Paulo Figueiredo in May at the White House — Photo: Reprodução/Truth Social – Donald Trump

The defeat of U.S. President Donald Trump in the midterm elections is expected to have a negative impact on the Bolsonaro movement and could open the door for more moderate sectors of the right to vie for leadership of the political side. But the result alone is not expected to dislodge the group from its position as the main electoral force on Brazil’s right, experts interviewed by Valor said.

Senator and former presidential candidate Flávio Bolsonaro (Liberal Party, PL, Rio de Janeiro), former federal lawmaker Eduardo Bolsonaro, and other leaders of the group have not immediately commented on the outcome of the midterms.

Fernando Bizzarro, who holds a PhD in political science from Harvard University and is a professor at Boston College, believes the change in the composition of the U.S. Congress will have little impact on relations between the two countries. Congress can also influence decisions through budget approval. According to him, the president retains autonomy over foreign policy, including tariffs and bilateral relations.

For Bizzarro, the most significant effect of Trump’s defeat is symbolic. Following the Bolsonaro movement’s loss to Luiz Inácio Lula da Silva (Workers’ Party, PT), the U.S. result represents another setback for the populist right in the Americas, which had been gaining ground, the professor said. “It seems the tide is now turning,” he said.

Bizzarro cautions that this string of defeats does not necessarily mean a direct loss of electoral strength for the Bolsonaro movement. He points to Flávio’s performance and the presence of the Bolsonaro surname among lawmakers and governors elected in the elections. “Bolsonarism is still the main electoral movement within the Brazilian right,” he said.

The professor does not, however, rule out an opening for a non-Bolsonaro-aligned right in the next elections. Trump’s weakening could benefit moderate sectors without diminishing the Bolsonaro movement’s electoral strength. “Both things can be true,” Bizzarro said, summing up his view that the Bolsonaro movement remains strong but could face tougher competition within the right.

Bizzarro believes that openly associating with Trump is likely to become less electorally appealing in Brazil. According to him, U.S. support and the tariffs imposed on Brazil hurt Flávio’s voting intentions during the campaign, leading the senator to mention Trump less frequently in the runoff. Following the defeat, he expects the right to continue looking to the U.S. as a point of reference while avoiding public displays of closeness to the Republican.

Jorge Chaloub, a professor of political science at the Federal University of Rio de Janeiro (UFRJ) and the Federal University of Juiz de Fora (UFJF), and a researcher of right-wing movements, believes Trump’s defeat has a greater impact in Brazil because of the Bolsonaro movement’s alignment with the American radical right. “It seems to me that the impact is greater than usual,” he said.

Chaloub explains that the rapprochement has gone beyond a strategic relationship to include explicit support for Trumpism and initiatives to pressure Brazil. In his view, the ties affect the Bolsonaro family’s image. “The silence has to do with that,” he said, referring to the lack of statements from Flávio and Eduardo. He believes that acknowledging their ally’s setback could be interpreted by supporters as a sign of defeat for their political group.

The professor believes Flávio’s and Trump’s losses could lead members of the right to seek alternatives to the Bolsonaro movement. He stresses, however, that former president Jair Bolsonaro still commands the largest electoral capital within this political camp and was able to transfer votes to his son quickly.

Chaloub sees different calculations at play among lawmakers and presidential candidates. For lawmakers, maintaining close ties with the former president may be advantageous; for those running in a national election, the association could be an obstacle.

“It is difficult to win with Bolsonaro, given that he and his son lost the last elections, but it also seems even harder to be competitive without Bolsonaro,” he said.

 

In the political scientist’s view, the fact that important leaders remain outside the country or in prison could create an opening for the Bolsonaro movement to lose its dominance on the right. He does not expect an immediate break with Trump. The most likely scenario, he said, is that Bolsonaro supporters will keep a lower public profile and make “fewer overtures” to the U.S. president.

Paulo Figueiredo, an influencer and ally of the Bolsonaro family in the U.S., was one of the few members of the group to comment on the elections. He celebrated the result in Florida, where he and the Bolsonaros live. “Thank God, my free state of Florida remains Republican […] At least that,” he wrote on social media.

The grandson of former president João Figueiredo, the last leader of Brazil’s military dictatorship, Paulo has lived in the U.S. since 2016. He was charged by the Office of the Prosecutor General (PGR) over alleged involvement in the coup plot and suspected obstruction of justice, for allegedly working in the U.S. to pressure Brazilian authorities. The cases have not yet resulted in a conviction by the Supreme Court.

Flávio is in the U.S., where he fled after the presidential defeat and amid Federal Police (PF) investigations into potential corruption and money laundering. Before the trip, Justice Alexandre de Moraes had ordered him to surrender his passports to the Federal Police within 24 hours, after the agency cited a risk of flight. Eduardo, meanwhile, has lived in the U.S. since 2025. He was sentenced by the Supreme Court to four years and two months in prison for obstruction of justice, after pressuring the Court through U.S. sanctions last year.

*By Guilherme Carvalho — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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New workweek rules spark surge in legal consultations

Businesses scramble to renegotiate schedules and contain costs, while lawyers warn of mounting litigation risks

 

 

 

Fabiano Zavanella — Foto: Ana Paula Paiva/Valor
Fabiano Zavanella — Photo: Ana Paula Paiva/Valor

Labor law firms across Brazil have seen a surge in consultations since a constitutional amendment ending the six-day workweek was enacted on October 16. With the requirement to provide two paid days off per week taking effect on December 16, employers are seeking legal advice on whether proposed changes to working arrangements could expose them to lawsuits from employees or unions. Lawyers warn that a wave of litigation is likely.

Constitutional Amendment No. 141 was approved between the first and second rounds of the presidential election, fulfilling one of President Luiz Inácio Lula da Silva’s campaign pledges. Some business leaders, however, had hoped the measure would be repealed or suspended if Senator Flávio Bolsonaro of the Liberal Party (PL) won the election, after he received more votes than President Lula in the first round.

Amid the uncertainty, law firm Rocha, Calderon e Advogados Associados created a dedicated webpage to answer frequently asked questions about the changes. Daily visits jumped from roughly 700 to more than 2,000 after the amendment was enacted, overwhelming the firm’s server and temporarily taking the page offline.

Fabiano Zavanella, a labor lawyer at the firm, said the most common question is whether the two weekly days off must be consecutive or can be taken separately. The latter is permitted. Employers have also asked whether they can introduce arrangements that redistribute the two weekly rest days throughout the month, a practice he believes could trigger litigation.

Clients are also seeking clarification about the transition to a 42-hour workweek beginning December 16, particularly whether arrangements involving shifts longer than eight hours can be negotiated directly with individual employees.

“No, that must be negotiated through a collective bargaining agreement,” Zavanella said, adding that “the biggest rush now is to engage with unions and understand how to negotiate.”

Collective bargaining challenges

Estevão Mallet, founding partner of labor law boutique Mallet Advogados, confirmed an extraordinary increase in inquiries, particularly since the amendment’s approval, which left businesses facing what he described as an “abrupt” transition.

“A company operating multiple shifts, such as a food manufacturer using a seven-days-on, seven-days-off schedule, needs not only to hire workers but also to train them, and that takes time,” he said.

Collective bargaining talks remain at a very early stage, Mallet said.

“The most likely outcome is that these negotiations will fail, the new rules will take effect, and workers’ unions will begin demanding additional benefits, such as higher profit-sharing payments, as a condition for reaching an agreement,” he said.

Mallet believes the amendment’s wording, which he considers poorly drafted because it received insufficient scrutiny, is contributing to both the flood of inquiries and the risk of legal disputes.

“We received more than 30 inquiries on this issue alone in October, far above normal levels,” he said. “We set up a dedicated advisory team just to handle it.”

The lawyer expects substantial litigation in the coming months.

“For specialized work arrangements, such as those on offshore oil platforms and in aviation, the government acknowledges the need for separate regulations. But no decree has been issued, and Amendment 141 itself says these arrangements must be regulated by law,” he said.

Mallet also expects the elimination of the six-day workweek to generate more litigation in Brazil than in other countries.

“Brazilian law requires two paid rest days per week, and any compensation for hours worked must take place within the same calendar month, or the employer faces a fine,” he said.

Holiday season pressures

The approaching Christmas shopping season is expected to intensify demand for legal advice throughout November and December, said Tatiana Modenesi, a lawyer at Bruno Freire Advogados.

“This is particularly true for retailers, since stores typically extend their opening hours and hire temporary workers, a measure that will become even more important during the transition under Constitutional Amendment 141,” she said.

Modenesi expects legal disputes to arise when employers seek to eliminate bonuses established under existing collective bargaining agreements as part of negotiations to adapt to the end of the six-day workweek.

“Demand for advisory services at our firm has already risen by about a third,” she said.

Small retailers have been particularly active in seeking legal assistance.

“They will either stop opening one day a week, usually the slowest trading day, or the owner will give up taking Saturdays off, work that shift and keep one assistant instead of two,” Modenesi said. “But there is a risk of losing customers because, in cities like São Paulo, people are very accustomed to having stores and services available seven days a week.”

For employers considering ignoring the new rules because they doubt enforcement by Brazil’s Labor Prosecutor’s Office (MPT), Modenesi warned that public awareness is already widespread.

“Everyone is talking about this issue,” she said. “Workers themselves are well aware of the changes. Failure to comply with the amendment could lead to frustration because everyone wants more time off, and if someone files a complaint, the administrative fine could be substantial.”

High-income employees

Marília Minicucci, a lawyer at Chiode Minicucci, has been warning clients about a separate provision affecting employees whose monthly compensation equals or exceeds two and a half times the maximum social security benefit, or R$21,188.

Under Constitutional Amendment 141, these employees are exempt from rules governing working hours and time tracking, unless the employer voluntarily applies them or they are required under a collective bargaining agreement. This provision is already in effect.

Minicucci said companies that currently track the working hours of employees in this income bracket must immediately adjust their employment contracts.

The concern stems from court precedents establishing that preserving more favorable employment conditions could make their subsequent removal an “adverse contractual change,” potentially rendering the amendment to the contract invalid.

“Prolonged maintenance of more favorable conditions can create legal obstacles to removing them later,” she said.

A recent ruling by the First Panel of Brazil’s Superior Labor Court supports that interpretation (case No. 326-45.2021.5.08.0011).

Payroll costs

At law firm Demarest, lawyers are examining another provision of Amendment 141 with direct implications for payroll expenses: the divisor used to calculate hourly wages for salaried employees, which also determines overtime pay.

“Under the rules of Amendment 141, the divisor will change, making the hourly wage more expensive,” said Celso Baez do Carmo Filho, a partner in the firm’s labor practice.

Carmo estimated that the workload of Demarest’s 10-member labor advisory team has increased by roughly 20% to 30% since October 16.

Most inquiries have come from retailers, industries with continuous operations and healthcare companies.

“A factory that used the six-days-on, one-day-off model, even under a collective bargaining agreement, is moving toward three-on, three-off; four-on, four-off; or two-on, two-off arrangements that accommodate round-the-clock operations,” he said.

“The number of hours worked per day is likely to increase, but the 40-hour weekly limit and two weekly rest days will remain in place. Under a four-on, four-off arrangement, for example, each employee works nine or 10 hours a day and then has consecutive days off. That is legal as long as it is agreed upon with the union,” Carmo said.

“However, most companies have not yet reached the stage of negotiating with unions.”

Union preparations

The Unified Workers’ Central (CUT), one of Brazil’s leading labor federations, and other union organizations have published a guidance booklet for affiliated unions, with legal assistance from LBS Advogadas e Advogados.

Among its recommendations is that unions immediately review existing collective bargaining provisions and formally notify employers or employer associations to request negotiations on amendments to current agreements.

The booklet also advises unions to “assess the suitability of national sectoral bargaining forums and negotiations by industry or business segment.”

LBS recommends that unions preserve provisions that are more favorable to employees, including shorter working hours already secured under existing agreements.

*By  Laura Ignacio and Luiza Calegari — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Central Bank leaves next rate move uncertain after halting cuts

Economists differ on whether decision to hold Selic at 13.75% signals prolonged hold, further easing or potential rate hike amid worsening inflation expectations

 

 

 

Fernando Gonçalves — Foto: Gabriel Reis/Valor

Fernando Gonçalves — Photo: Gabriel Reis/Valor

Brazil’s Central Bank halted its interest rate-cutting cycle on Wednesday (Nov. 4), keeping the benchmark Selic rate at 13.75% in response to a recent deterioration in inflation expectations. While the decision by the Monetary Policy Committee (Copom) appeared conservative, its accompanying statement offered no guidance on what might come next. Policymakers also stopped short of signaling that they could raise rates if the inflation outlook worsens further.

The decision ended a series of five consecutive 25-basis-point cuts that began in March. The worsening inflation outlook since the presidential election prompted the shift, in line with expectations from most economists surveyed by Valor last week.

Copom said monetary policy had become more challenging, requiring “composure and caution” in light of “a substantially restrictive Selic rate, a significant increase in uncertainty surrounding the baseline scenario, higher inflation expectations, and a more pronounced slowdown in domestic economic activity.”

Policymakers acknowledged that inflation expectations had drifted further away from the 3% target, including over longer horizons, a development that “contributes to price formation and increases the cost of disinflation.” At the same time, the committee emphasized the impact of “supply shocks” on its inflation forecast for the relevant monetary policy horizon. That projection rose to 3.5% for the second quarter of 2028, from 3.2% for the first quarter of that year.

Mixed signals

For Fernando Gonçalves, head of economic research at Itaú Unibanco, those qualifications played down the deterioration in inflation expectations revealed by the latest Focus survey more than was warranted.

“I would say [the statement] was less hawkish than we expected, even though it conveyed the message that bringing inflation back to target will be challenging,” he said.

Gonçalves believes Copom sought to offset the worsening inflation forecasts by emphasizing both the influence of supply shocks and its assessment that the Selic remains “substantially restrictive.”

“This is not a statement that sends the message that interest rates will stay high for longer. It leaves things open and focuses on describing the uncertainties, even pointing to conflicting signals,” he said.

He cited the committee’s description of economic activity slowing “more sharply” and a labor market showing “signs of cooling at the margin,” despite remaining resilient.

“In a way, it creates room to look through this substantial deterioration in forecasts, since part of it stems from supply shocks and the Focus survey still points to a declining path for the Selic,” Gonçalves said.

In his view, the statement suggests that the bar for raising interest rates is quite high, while leaving open the possibility of further cuts depending on how economic conditions evolve.

Cláudio Ferraz, chief economist at Galapagos Capital, shares that interpretation, suggesting Copom may have sought to discourage speculation about a potential rate increase. Still, he cautioned that more details would emerge only with the release of the meeting minutes next week.

“Taken as a whole, it was the right decision and a tough statement, but as I said, those references did not go unnoticed,” Ferraz said, referring to the Central Bank’s characterization of the Selic as “substantially restrictive” and its acknowledgment of slowing economic activity.

Fiscal uncertainty

Galapagos expects the Selic to remain unchanged over the coming months. Ferraz believes any discussion of renewed rate cuts will have to wait until the second half of the year, once the reelected government has clarified its fiscal policy.

“As fiscal uncertainties are addressed, that could perhaps have a positive impact on asset prices, potentially halt the process of inflation expectations becoming unanchored and, ideally, eventually lead to their reanchoring. Then, given the slowdown in economic activity, it might be possible to discuss a scenario in which interest rates could be adjusted again. But that is not yet on our radar,” he said.

Roberto Padovani, chief economist at Banco BV, described Copom’s statement as “concise” and “cautious.” He said policymakers acknowledged that monetary policy had become more difficult to manage without offering clues about their next steps.

Padovani also pointed to uncertainty over the incoming administration’s economic policies as a reason for the committee’s restrained language.

“We have just come out of an election, and both the Central Bank and analysts are still waiting for information,” he said.

Although investors may interpret the statement as relatively “dovish,” signaling an inclination toward lower interest rates, Padovani argued that the Central Bank needs more information before it can take a clearer position.

“I understand that the Central Bank does not have enough information to issue a much more forceful statement. We need to know what kind of fiscal policy we are going to have. The Central Bank cannot and should not anticipate that. It cannot keep reacting to short-term tensions,” he said.

A more hawkish reading

Camila Faria Lima, chief economist at Canvas Capital, offered a different interpretation, describing the statement as slightly more hawkish. In her view, the decision to halt rate cuts was itself a significant signal, particularly given the committee’s acknowledgment of the deteriorating inflation outlook.

Faria Lima said Tuesday’s Focus survey had prompted her to revise her baseline forecast from a further 25-basis-point cut to the decision Copom ultimately made: holding the Selic steady. With inflation expectations worsening, she concluded that the argument for another reduction was no longer tenable.

“The Focus survey showed very clearly that inflation expectations were becoming even more unanchored, almost as if a sharper slowdown in economic activity did not matter. The fact is that we are facing greater inflationary pressures and expectations are being called into question even over longer horizons, with everything moving toward 4%. That sent a message that made it very difficult for the Central Bank not to react and simply stick to its flight plan,” she said.

Faria Lima therefore sees the communication as more forceful, although she acknowledged that references to a sharper economic slowdown and signs of moderation in the labor market softened its tone.

She also highlighted Copom’s decision to raise its inflation forecast for the relevant monetary policy horizon from 3.2% to 3.5%, even as that horizon shifted from the first to the second quarter of 2028.

The economist agreed with the committee’s assessment that monetary policy had become more challenging, caught between a worsening inflation outlook and a more pronounced slowdown in economic activity.

“Ultimately, the committee highlighted opposing forces, which is why it describes the scenario as more challenging. It will have to contend with both,” she said.

*By Hamilton Ferrari and Estevão Taiar — Brasília

Source: Valor International

https://valorinternational.globo.com/

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Tax authority promises updated VAT rules ahead of 2027 rollout

Federal Revenue says transition is on schedule, despite concerns over tax assessment systems, municipal readiness, implementation of new consumption taxes

 

 

 

 

Federal Revenue: program prioritizes companies’ good faith, waiving penalties for taxpayers who act transparently — Foto: Marcelo Camargo/Agência Brasil
Federal Revenue: program prioritizes companies’ good faith, waiving penalties for taxpayers who act transparently — Photo: Marcelo Camargo/Agência Brasil

The updated version of the regulations governing the Contribution on Goods and Services (CBS) and the Tax on Goods and Services (IBS), the new consumption taxes established by Brazil’s tax reform, is expected to be released next week, the Federal Revenue Service said Tuesday (3). The absence of this document is one of the outstanding issues raised by experts interviewed by Valor in a report published Tuesday (3).

In the report, tax lawyers questioned whether the country would be able to transition to the new tax system on January 1, as stipulated by the reform, which amended the Federal Constitution, given the lack of documents, systems, and guidance.

“It is not possible to presume a constitutional change,” the Federal Revenue Service said in a statement. “The institution’s guidance remains that implementation will proceed according to the constitutional timetable.”

The agency added that “implementation is moving forward, regulatory instruments continue to be issued, technological solutions are under development, and the country has more than two decades of accumulated experience in tax digitalization to ensure a safe, predictable, and successful transition.”

The agency also said that a compliance program had been established, “prioritizing companies’ good faith and waiving penalties for taxpayers who act transparently and comply with the rules already published.”

Tax lawyers raised concerns about how the so-called assisted tax assessment system will work. It is a type of pre-filled tax return for the CBS and IBS. Under the system, the Federal Revenue Service will provide taxpayers with their tax credits and liabilities. However, taxpayers will not be able to amend the information themselves; they will only be able to approve or reject it.

In response, the agency said adjustments are being made to the system to allow corrections. The first version with this functionality will be available for the January 2027 tax assessment, it added.

Another issue raised was the risk of conflicting interpretations of the CBS and IBS rules. The Federal Revenue Service said federal administrative tax appeals bodies are already prepared to review cases involving the CBS. The agency is also working with the IBS Management Committee, made up of representatives from the states, the Federal District, and municipalities, to share formal tax rulings through common systems and promote consistency in administrative interpretations.

In the judicial sphere, the agency argued that Brazil’s procedural legislation already provides mechanisms to resolve potential jurisdictional disputes between judges and conflicting interpretations, to preserve legal certainty during the transition and preventing inconsistent court decisions.

Experts also pointed out that not all municipal governments are prepared to issue invoices under the new system. According to the Federal Revenue Service, municipalities are gradually joining the system. “Currently, 5,571 government entities—municipalities and the Federal District—have joined the National Electronic Service Invoice (NFS-e) agreement. Of these, 5,466 are already active and operational in the system, representing 98% of Brazilian municipalities,” the agency said.

One expert also noted the lack of invoice templates for rental payments and utility bills for water, electricity, and gas. According to the Federal Revenue Service, these templates are already available.

Another concern was the lack of complete data in the Brazilian Real Estate Registry (CIB), a kind of “tax ID for properties” that will be mandatory for transactions starting next year. Federal Revenue Service data show that the registry is not yet complete. The agency said 3,356 municipalities have joined the registry, including all state capitals except Macapá, in Amapá state. More than 24.5 million CIB numbers have already been issued.

Experts also raised concerns about the 11.3% reference rate for the CBS calculated by the Federal Court of Accounts (TCU), which is under review in the Senate. In response, the Federal Revenue Service said the figure is a reference rate designed to ensure revenue neutrality, but “does not correspond to the effective tax burden borne by taxpayers.” The actual burden, it said, depends on tax credits generated throughout the supply chain, whether preferential tax regimes and reduced rates apply, and other factors.

One indication that implementation of the reform is progressing, the Federal Revenue Service said, is the number of tax documents already issued under the new system. A total of 3.6 billion documents had been issued as of November 2, representing 86.9% of the total. Data on a government dashboard also show, however, that 23.4% of businesses issuing invoices still do not report CBS and IBS information, while another 27% report it only partially.

*By Lu Aiko Otta and Giordanna Neves — Brasília

Source: Valor International

https://valorinternational.globo.com/

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COP31 bets on zero waste and the circular economy

Brazilian adviser Carlos Silva Filho wants waste and circularity recognized in the conference’s final Antalya declaration

 

 

 

 

Carlos Silva Filho — Foto: Divulgação
Carlos Silva Filho — Photo: Divulgação

With no major negotiating issue or review of Paris Agreement targets on the agenda, COP31—the United Nations Climate Change Conference taking place from November 9 to 20 in Antalya, Turkey—aims to establish itself as the conference of implementation. The Turkish presidency has selected waste, the circular economy, and zero waste as one pathway for demonstrating practical results.

“This will be the COP of action and implementation,” explained Carlos Silva Filho, special adviser to the COP31 Climate High-Level Champion.

The Brazilian is one of four advisers on the team led by Samed Agirbas, COP31’s climate champion. Silva Filho is responsible for the Sustainable Development and Circular Economy agenda and helped formulate the sector’s targets, announced in September during New York Climate Week.

For waste, the goals are to halve the growth in municipal waste generation by 2035 and raise the global circular-material use rate to at least 15% over the same period. The rate currently stands at 6.9%.

The “Atlas Global de Resíduos Sólidos” (“Global Solid Waste Atlas”), released by the United Nations Environment Programme (UNEP) and the International Solid Waste Association (ISWA) in 2024, projects that solid-waste generation will rise from 2.3 billion tonnes in 2023 to 3.8 billion tonnes by 2050.

Currently, 38% of waste is discarded at unsuitable sites, and only 19% of municipal solid waste is recycled. Zero-waste and circular-economy measures, by contrast, could generate a net annual gain of $108.5 billion.

Silva Filho noted that waste is still regarded as relatively unimportant to the climate agenda because the sector directly accounts for about 3% of global greenhouse-gas emissions. However, studies underpinning the team’s work show that proper waste management could help reduce total emissions by as much as 25% because its effects extend far beyond the sector itself.

Biomethane is one example. Produced from waste, it reduces emissions within the sector and, when used as fuel, also cuts transportation emissions. Recycling is another example. By replacing virgin raw materials, it reduces emissions throughout the supply chain, from extraction to manufacturing, as when recycled aluminum replaces virgin bauxite.

Methane is another concern. “If we do not tackle methane, tackling carbon dioxide will do no good,” Filho warned.

Climate Tinder

Silva Filho recalled that years ago, during a COP meeting about issues to be included in the negotiations, he raised his hand to propose waste and the circular economy but was told the subject was unrelated to the climate agenda. Shortly afterward, at COP28 in Dubai in 2023, the sector secured its first pavilion.

Silva Filho advocates using zero waste and the circular economy as a cross-cutting platform connecting the workstreams of the climate-action agenda inherited from COP30. Those discussions gave rise to the Zero Waste Action Platform, launched in Turkey in June.

The Brazilian described it as a kind of “Tinder for climate action,” connecting initiatives with what they need. “Not everyone needs money. One initiative may need regulatory improvements, while another needs to connect with infrastructure that already exists,” he explained. In his view, this cross-sector connection should be COP31’s greatest legacy.

With no major negotiation at stake, companies have begun to realize that the conference’s results depend on them, Silva Filho noted. “While governments set targets and provide guidance, the private sector carries out the work.”

This year, the conference will feature its own building, the Zero Waste Pavilion, with three auditoriums and 180 plenary sessions planned. Zero Waste Day will be held on November 11, coinciding with the leaders’ summit. The program includes a panel on biomethane featuring Brazilian company Orizon.

“These are not projects from someone who had an idea and wants to get it off the ground. This is what the waste sector is already doing in practice,” Filho emphasized. Rio de Janeiro has already announced that it wants to join the zero-waste districts through an initiative to divert organic waste from landfills. The team is also working to ensure that the final Antalya declaration recognizes proper waste management and zero waste.

The Brazilian government brought the recently approved “Estratégia Nacional de Economia Circular” (“National Circular Economy Strategy”) to the discussions and presented Recircula Brasil. This online system tracks the materials chain to measure whether the global 15% circularity target is being met.

Domestically, however, Brazil is still moving slowly. The country’s waste-recovery rate is around 4% to 5%, according to Silva Filho. “The regulatory and technological framework is ready. We need to put it into practice,” he argued.

Financing is one of the bottlenecks. According to Silva Filho, the main challenge is not only investing in infrastructure but also funding the long-term operation and maintenance of facilities such as waste-treatment plants, for which no funding source exists. Alternatives under discussion include carbon or methane credits and mechanisms that hold producers responsible for what they place on the market.

*By Naiara Bertão — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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Fiscal uncertainty weighs on Brazil’s GDP growth outlook

Expectations of weaker growth in 2026-2027 are compounded by forecasts that Central Bank will halt Selic rate cuts or raise interest rates

 

 

 

 

Homero Guizzo — Foto: Ana Paula Paiva/Valor
Homero Guizzo — Photo: Ana Paula Paiva/Valor

After bets on Selic rate cuts reversed in financial markets following the surprise outcome of Brazil’s presidential election runoff, analysts are now forecasting an even more challenging 2027 for economic growth. Expectations that the benchmark interest rate will remain unchanged for an extended period, or even rise again, add to signs that economic activity is losing momentum more rapidly this semester, reducing the statistical carryover into next year.

In a revised outlook released Friday (30), Itaú Unibanco said it now expects GDP to grow 1.6% this year, down from its previous forecast of 1.7%. For 2027, it cut its estimate from 1.2% to just 0.5%.

“The revision reflects the incorporation of higher interest rates and weaker economic activity over the coming year. The need to maintain restrictive monetary conditions for longer is expected to intensify the cumulative effects of monetary tightening on consumption, investment and credit conditions,” wrote the team led by former Central Bank director Diogo Guillen. The bank now expects the Monetary Policy Committee (Copom) to halt its rate-cutting cycle and keep the Selic policy rate unchanged at 13.75% through the end of 2027, in an effort to curb inflation, which it projects will reach 6.1% by the end of next year.

Economic weakness and high inflation “limit growth in real income and consumption, with a particularly significant impact on lower-income households. At the same time, high household debt makes consumption more sensitive to tighter financial conditions. Against this backdrop, we expect domestic demand to remain sluggish in 2027, with the balance of risks to growth still skewed to the downside,” Itaú said.

ABC Brasil has also removed Selic rate cuts from its baseline scenario through the end of 2027. “With tighter financial conditions and less fiscal stimulus, we have lowered our GDP growth estimate from 1.9% to 1.7% in 2027 and to 1% in both 2027 and 2028,” the bank said. It had previously forecast growth of 1.5% for 2027 and 1.6% for 2028.

President Lula’s election victory on Sunday (25) caught much of the market off guard and triggered a sharp sell-off in domestic assets, prompting analysts to revise their forecasts. With expectations that the necessary fiscal adjustment will not materialize, risk premiums have risen, as have longer-term inflation expectations. Despite Central Bank interventions, the dollar rose 9.04% last week, its biggest weekly gain since the 2008 financial crisis. The benchmark stock index Ibovespa also posted its steepest weekly loss since the pandemic. In the interest-rate market, 10-year yields climbed back above 15%.

“The selloff in Brazilian assets poses a greater threat to growth than to inflation in the country,” Capital Economics said in a report. “The most immediate effect will be exchange-rate pass-through to inflation, but this should be limited. If the exchange rate remains at current levels, the pass-through should add 0.3 percentage points to headline inflation over the next six months,” analyst Liam Peach wrote.

The greater threat comes from tighter financial conditions, he said. “The economy is vulnerable to higher interest rates because of the deterioration in public- and private-sector debt. Household debt service has reached a new record of 29% of income, while borrowing costs and corporate defaults are at historically high levels. Even if Copom keeps the Selic rate unchanged at its next meetings, borrowing costs are likely to rise. Combined with the fact that the economy was already showing signs of slowing before the election, tighter financial conditions reinforce our forecast that GDP growth will decelerate to 1% next year.”

Asset manager ASA has an even gloomier outlook. Although it still expects further rate cuts by the end of 2027—forecasting that the Selic rate will resume its decline at some point between the second and third quarters—it has cut its GDP growth forecast for next year from 1% to zero. The revision reflects the delayed impact of measures announced this year, “regardless of any fiscal measures that may eventually be announced.” The firm also warns of a risk of recession, depending on how economic agents respond.

“Without expectations of a credible fiscal adjustment, inflation expectations are likely to remain unanchored, and may even deteriorate further, making the Central Bank’s job more difficult. The monetary authority is expected to resume rate cuts only around mid-2027, as the sharper loss of momentum in domestic activity becomes more evident. In any case, the new reality will involve a higher neutral interest rate, with the Selic ending 2027 at 13%,” ASA said.

“In this scenario, with lower GDP growth, interest rates remaining at higher levels and technical and political obstacles to a faster fiscal adjustment, we project a further deterioration in the trajectory of gross public debt, which is expected to rise more rapidly in the coming years. We forecast general government gross debt at 88.5% of GDP in 2027, a new record for the series, surpassing the level reached during the pandemic.”

At Terra Investimentos, the expectation is that worsening inflation forecasts in the Focus survey will feed into the Central Bank’s own projections and force policymakers to raise interest rates in 2027, even as the economy undergoes a pronounced slowdown.

“We were already working with an inflation forecast above the market median for next year, at around 5.3%, because we were factoring in effects that no elected government can control, such as the impact of El Niño on food prices. But there was some expectation that a new government might offer a more constructive approach to fiscal policy, help anchor expectations and stabilize the exchange rate, which would help keep industrial goods and services prices in check. Without that, our forecast rises further,” said Homero Guizzo, the brokerage’s chief economist. He currently forecasts a Selic rate of 14.50% and IPCA inflation of 5.7% next year, but stressed that the estimates are preliminary and could rise.

With higher benchmark interest rates and a likely deterioration in the business environment, Guizzo has also provisionally lowered his GDP growth forecast for next year from 1.2% to 0.9%. “The main factor behind the slowdown will be developments in the credit market, which has been deteriorating for some time. More investment and consumption plans will be put on hold,” he said. The slowdown will be less severe only because the next government’s fiscal policy is expected to remain expansionary, preventing a sharper contraction in economic activity, he added.

*By Marcelo Osakabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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External risks add to Brazil’s inflation challenges

Oil prices, U.S. monetary policy add to domestic inflation risks, including El Niño effects on food prices, potential labor cost increases

 

 

 

 

Basiliki Litvac, of XP — Foto: Keiny Andrade/Valor
Basiliki Litvac, of XP — Photo: Keiny Andrade/Valor

The international environment is emerging as a source of concern for Brazil’s efforts to control inflation in the short and medium term. In particular, economists are increasingly focused on growing threats related to oil prices and U.S. monetary policy.

These factors add to an already extensive list of domestic risks on the radar, including the impact of El Niño on food prices, the potential effects of ending the six-day workweek with one day off (known as the 6×1 schedule) on labor costs, tax reform, and the new basket of goods and services monitored by the Extended Consumer Price Index (IPCA). The basket is expected to change with the next edition of the Household Budget Survey (POF), due out at the end of this year.

Brent crude prices have returned to around $115 a barrel amid growing indications that the conflict between the United States and Iran could escalate again. President Donald Trump has signaled that he intends to pursue a short-term military campaign after the U.S. midterm elections, which begin in less than a week. Meanwhile, Israeli Prime Minister Benjamin Netanyahu, who faces a political test in elections in Israel this week, has renewed nuclear threats against neighboring Iran.

In Brazil, the impact of these shocks has been cushioned by the government’s subsidy and support programs. “The question is whether, if this conflict persists, the government will be able to maintain this policy for long given its fiscal cost. Otherwise, it would have to let prices rise, which would affect inflation,” said Julio Cesar Barros, an economist at Daycoval. His calculations show that removing the subsidies would add 0.4 to 0.5 percentage points to the IPCA.

In Buysidebrazil’s baseline scenario, which projects the IPCA at close to 4.7% in 2027, the average oil price that year is expected to fall to $85 a barrel as risks in the Middle East subside. If the reversal is less pronounced, however, the inflation estimate would be higher. A return to $100 a barrel could add 0.4 percentage points to next year’s projection, while a decline to $110 would add another 0.6 percentage points, said the consultancy’s chief economist, Andréa Damico.

“The balance of risks for the IPCA is extremely skewed to the upside. Previously, there were some disinflationary factors, such as a lower risk premium and a stronger exchange rate in the event of an opposition victory in Brazil, that could have offset all the upside risks, including El Niño and the end of the 6×1 work schedule. Now, we no longer have those counterweights,” the economist noted.

In a recent study, XP Investimentos estimates that fuel subsidies and support measures could remain in place for longer, since at oil prices above $105 a barrel, their net fiscal cost is positive.

“However, even at this price level, gasoline prices would still face some upward pressure, requiring a degree of adjustment and potentially adding up to 0.15 percentage points to the IPCA if Petrobras implements a partial price increase. Therefore, fiscal balance alone does not guarantee that current fuel prices can be maintained,” noted Basiliki Litvac and Rodolfo Margato, the study’s authors.

In its baseline scenario, however, the firm expects oil prices to average $75 a barrel in 2027, which would allow the government to phase out these policies. “Since subsidies have been mitigating the increase in prices, their removal would be gradual,” Litvac argued.

She and Margato stressed that crude oil prices are not the only factor that needs to be considered at this point. Another is the so-called crack spread, or the difference between the price of the commodity and the market value of refined products such as gasoline and diesel. This indicator—a proxy for refinery profit margins—remains well above the levels seen over the past five years.

In simulations using different oil prices and crack spreads, the economists found that, at current levels ($115 a barrel), removing the tax exemption on gasoline could have an upside impact of between 0.05 and 0.74 percentage points on the IPCA, depending on prevailing refining margins. If oil prices return to $85 a barrel, the increase would range from zero to 0.22 percentage points.

A return to $75 a barrel, therefore, would allow the government to reverse subsidies and tax breaks while narrowing the gap between domestic and international prices without passing the increase on to consumers. “However, we recognize that risks remain to this more favorable oil price trajectory, creating an upside bias in our inflation forecast,” they wrote in the XP study.

As for U.S. monetary policy, the risk is that higher interest rates in the United States will strengthen the dollar and lead to exchange-rate pass-through in Brazil. “I no longer see the kind of dollar weakness that did so much to help domestic inflation,” said Solange Srour, UBS GWM’s head of Brazil macroeconomics. “The U.S. economy is holding up well, and unemployment remains low. The market believes the Fed will raise interest rates in December, and the latest inflation figures came in higher than expected. So the risk here is a weaker exchange rate.” In her view, “even if some fiscal adjustment is announced, the expected benefit of a stronger currency resulting from a change in the administration will not materialize.”

In XP’s exchange-rate model, the three most important factors are Federal Reserve policy, fiscal risks, and commodity prices. On the latter, Margato noted that price movements have been supportive of the real. The Brazilian currency had the third-best performance among emerging-market currencies through the second round of Brazil’s election and, even after depreciating by approximately 7% following President Luiz Inácio Lula da Silva’s victory, has continued to track the group average.

“The fact is that Brazil is a commodity exporter, and our terms of trade have improved significantly. The balance of payments is an important underlying strength. Estimates for both the trade surplus and foreign direct investment in Brazil have been revised upward. This is an important source of support for the exchange rate, even during periods of heightened domestic risk,” he noted.

Regarding the other two factors, the economist acknowledges the possibility of greater pressure in the opposite direction. “Interest rates appear to pose the greater risk. At the short end of the curve, rates respond to the possibility that the Fed may need to tighten policy further because economic activity remains strong and inflation persistently above 2%. The belly and long end of the curve, meanwhile, reflect growing concerns about fiscal risk, which is also something we will be discussing extensively in Brazil over the next few years.”

XP estimates that the average exchange rate in 2027 will be around R$5.30 to the dollar. However, in a simulation of a more severe stress scenario for the U.S. dollar, the exchange rate in Brazil could reach R$5.65. In that case, exchange-rate pass-through would add 0.45 percentage points to the IPCA over 12 months.

Barros, of Daycoval, noted that the wide spread between Brazil and the United States supports the exchange rate, even after adjusting for risk. “An exercise we conducted shows that only when this risk-adjusted spread falls below 3.9% do interest-rate changes amplify the exchange rate’s response. And given the rate cuts priced in for Brazil and the hikes expected in the U.S., we still have some room to absorb those moves. That threshold will only be crossed at the end of 2027,” he said.

He noted that the greater risk lies in the Fed accelerating its rate hikes. In Brazil, although the possibility of faster rate cuts cannot be ruled out, the expectation is that the Central Bank will maintain its pace of 0.25 percentage points per meeting. “From an economic activity standpoint, a slowdown is underway, but we have assigned less weight to the risk of a recession because of some fiscal stimulus measures recently approved. On the inflation side, there are supply-side shock challenges that could push prices higher,” he said.

*By Marcelo Osakabe — São Paulo

Source: Valor International

https://valorinternational.globo.com/

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