Markets expect Selic to stay at 15% as January cut remains unclear

Out of 112 institutions surveyed, only two expect the monetary easing cycle to begin on December 10. Most economists told Valor that COPOM will likely stick to a cautious message and leave the door open for a potential cut in January. The market remains divided over that possibility: 54% expect cuts to begin in January 2026, while 44% see them starting in March or later.

The Central Bank’s cautious tone, especially from its chair, Gabriel Galípolo, has created uncertainty over what signals may emerge from this week’s statement.

Among those expecting little change from COPOM’s November message is Marcela Rocha, chief Latin America economist at Principal Asset Management. She sees little incentive for the committee to soften its tone now. Rocha expects only minor adjustments to the wording and believes the Bank’s inflation forecast will stay at 3.3% over the relevant horizon.

“A rate cut in January would be justifiable, but the Central Bank’s messaging has remained hawkish. It hasn’t shown much enthusiasm for the recent better inflation numbers, nor emphasized the economic slowdown. Galípolo himself continues to stress resilient labor market data,” she said.

While Rocha’s base case includes a 25-basis-point cut in January, bringing the Selic to 14.75%, she admits confidence is low due to COPOM’s conservative posture. She now sees a greater chance of the first cut coming in March.

“What still leaves January on the table was Galípolo’s recent attempt to downplay the phrase ‘quite prolonged’ [regarding the high-rate period],” she noted. Rocha referred to Galípolo’s remarks at an XP Investimentos event on December 1, where he said that keeping or removing that phrase doesn’t indicate any specific COPOM decision. “I don’t think we have an obligation to build codes into our communication to signal when we’ll act,” Galípolo said.

In Rocha’s view, keeping the phrase in December’s statement no longer rules out a January cut. Still, she said, “The bar for a cut is now even higher.”

“We’d need to see positive surprises in the data, not just in line with expectations, and perhaps another drop in inflation expectations in the Focus survey,” she said. “Inflation data may surprise on the optimistic side, but markets could still remain skeptical about a January cut.”

Outlook for January and beyond

Rafaela Vitória, chief economist at Inter, said the phrase “quite prolonged” refers broadly to the period of tight monetary policy and shouldn’t be seen as a signal for COPOM’s next moves.

“Even if the Selic ends 2026 at 12%, that’s still very restrictive,” she said. Still, if December’s statement is too similar to November’s, it would suggest little openness to discussing a rate cut.

“We’re watching other parts of the statement for clues. We’re still far from the neutral rate, so the beginning of cuts would just ease some of the current excess,” she said.

Ivo Chermont, chief economist at Quantitas, believes Galípolo was effective in defusing the significance of the phrase and that the Central Bank does not want to commit to any path yet, given the number of data points still to come before January.

“Galípolo tends to say it’s not that he knows and won’t say—it’s that he really doesn’t know. I think COPOM’s language will be neutral relative to market pricing and won’t give a concrete signal,” said Chermont, who expects the first cut only in March.

Chermont also pointed out that there were other times when the Central Bank cut rates even while its inflation forecast was still close to the target, but this time could be riskier since Focus survey expectations are also above target.

“It would be the first time COPOM cuts with both its own model and Focus outside the target range. Waiting could buy three or four months for Focus to move closer to the center of the target. A hawkish surprise would help bring expectations down. And even the calendar helps: from January to March, with Carnival, there’s less political noise. That would be very advantageous.”

Still, Chermont noted that if fourth-quarter activity data show clearer signs of a slowdown, the outlook could shift. His firm expects the Selic to end 2026 at 11.5%.

Optimism for early cuts

Vitória at Inter is more optimistic and sees room for the easing cycle to begin in January, based on the slowdown in activity and inflation. This could be reflected in this week’s COPOM statement, she said.

“We expect a slightly softer tone in the statement, opening space for a rate cut discussion in January,” she said. She sees further room for inflation expectations in the Focus survey to decline, along with a more favorable external environment. Expectations of continued rate cuts by the U.S. Federal Reserve should help keep the dollar stable, supporting Brazil’s disinflation process.

She also said recent economic data, especially third-quarter GDP, showed a clearer deceleration beyond COPOM’s gradual slowdown scenario. “The deceleration was clearer, especially given the GDP’s qualitative breakdown, with a larger drop in consumption, which favors a more benign inflation outlook.”

Inter’s base case sees the Selic ending 2026 at 12%, in line with market-implied rates. For now, Vitória doesn’t see the election year as an obstacle to short-term rate cuts. But if volatility drives the exchange rate per U.S. dollar closer to R$6, COPOM might be forced to slow the easing cycle.

Rocha of Principal, meanwhile, expects the Selic to fall more modestly next year to around 13%. She warned that a resilient labor market and expected demand-side stimulus tied to the election year could pose upside risks to growth and inflation.

In addition to election volatility and renewed focus on Brazil’s fiscal outlook, she sees a less favorable global backdrop for the real. “Even if rate differentials work against the dollar as the Fed eases, the U.S. economy is still expected to grow more than 2%. So we don’t see much room for the dollar to weaken. A stronger or steady dollar, combined with local political uncertainty, could weigh on the real,” she said.

*By Gabriel Caldeira and Gabriel Roca — São Paulo

Source: Valor International

https://valorinternational.globo.com/