{"id":98479,"date":"2026-05-11T15:30:53","date_gmt":"2026-05-11T18:30:53","guid":{"rendered":"https:\/\/murray.adv.br\/?p=98479"},"modified":"2026-05-11T15:30:53","modified_gmt":"2026-05-11T18:30:53","slug":"copom-rate-cut-clouds-view-of-reaction-function","status":"publish","type":"post","link":"https:\/\/murray.adv.br\/en\/copom-rate-cut-clouds-view-of-reaction-function\/","title":{"rendered":"COPOM rate cut clouds view of \u2018reaction function\u2019"},"content":{"rendered":"
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Analysts say Central Bank is buying time after oil shock, but strategy may prove costly if inflation expectations keep drifting higher<\/strong><\/em><\/h6>\n<\/div>\n<\/div>\n
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The Central Bank\u2019s Monetary Policy Committee (COPOM) delivered an unusual decision in late April, cutting the Selic base rate by 25 basis points even as its inflation forecasts deteriorated for the relevant policy horizon.<\/p>\n<\/div>\n

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Since the committee formally began targeting the 18-month-ahead window for monetary policy in mid-2024, this was the first time the benchmark rate and inflation projections moved in opposite directions. The decision has raised caution among market participants, who now see less clarity in the Central Bank\u2019s reaction function.<\/p>\n<\/div>\n

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With the inflation picture worsening significantly after the oil shock caused by the war in the Middle East, investors believe the COPOM is betting that oil supply will normalize and is trying to preserve the easing cycle to gain time, a strategy that could become costly later.<\/p>\n<\/div>\n

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That view is shared by Juliano Cec\u00edlio, chief economist at asset manager Adam Capital, who disagrees with the decision to keep cutting the Selic amid current inflation above target and unanchored inflation expectations, both in the market and at the Central Bank itself. He also notes that Brazil\u2019s economy was already feeling the effect of a significant fiscal impulse, which supported activity and service prices throughout 2025 and early this year.<\/p>\n<\/div>\n

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\u201cWe had the largest forecast error in the IPCA\u2019s historical series in February, before the war began, and that was basically caused by service inflation,\u201d Cec\u00edlio said, referring to Brazil\u2019s benchmark consumer price index. \u201cRight after that, when the war came, a narrative emerged that expectations rose only because of that [in the Central Bank\u2019s Focus survey], but before the conflict there was already a series of fiscal stimuli and an acceleration in service inflation.\u201d<\/p>\n<\/div>\n

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The three-month moving average of annualized and seasonally adjusted underlying services inflation, a less volatile measure than the monthly reading and widely used by the market, shows signs of acceleration. The measure stood at 4.74% in December, 5.41% in February, and 5.32% in March. Some firms estimate that April\u2019s IPCA may show a new acceleration in underlying services inflation, to around 5.7%.<\/p>\n<\/div>\n

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For Cec\u00edlio, the oil shock acted as a \u201csmokescreen\u201d that kept the Central Bank from identifying the core problem: \u201cAn economy strong enough to prevent service inflation from cooling or to keep it accelerating.\u201d<\/p>\n<\/div>\n

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More tolerance<\/strong><\/p>\n<\/div>\n

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Cec\u00edlio also sees greater leniency by the monetary authority toward the worsening inflation forecasts, although he says the phenomenon is neither new nor limited to Brazil. A study by Adam Capital shows COPOM\u2019s sensitivity to deteriorating projections has declined since the pandemic, a trend also seen at major central banks such as the Federal Reserve.<\/p>\n<\/div>\n

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\u201cIn 2026, we mark the sixth consecutive year in which the PCE deflator [the Fed\u2019s preferred inflation gauge] is above the 2% target. That is an unusual situation,\u201d Cec\u00edlio said. \u201cThe Central Bank [of Brazil] looks at these post-pandemic examples of greater tolerance for inflation deviations, and that helps explain this looser reaction function.\u201d<\/p>\n<\/div>\n

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Cec\u00edlio said reduced sensitivity to expectations has already led to monetary-policy mistakes in recent years, including the Selic-cutting cycle in 2023 and 2024, which was followed soon after by a 450-basis-point increase in the benchmark rate between September 2024 and June 2025.<\/p>\n<\/div>\n

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\u201cCentral banks did not make bets in the past. They always worked with the most conservative premise possible, and that no longer seems to be happening,\u201d Cec\u00edlio said. He sees the COPOM losing credibility in the current rate-cutting cycle, as longer-term IPCA expectations become further unanchored.<\/p>\n<\/div>\n

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Since the start of the war, the median Focus survey forecast for 2028 inflation has risen to 3.64% from 3.5%, a development the COPOM itself has flagged with concern in its recent communication.<\/p>\n<\/div>\n

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Clearer threshold<\/strong><\/p>\n<\/div>\n

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The additional drift in inflation expectations was highlighted by BTG Pactual as a warning sign for monetary policy. \u201cThe deterioration reduces the comfort to extend the cycle without making the reaction threshold clearer, that is, which conditions would lead to a pause, an end to the cycle, or greater restriction. Without that, the risk increases of further deterioration in the anchoring of expectations and in the credibility of communication,\u201d economists Tiago Berriel and Iana Ferr\u00e3o said.<\/p>\n<\/div>\n

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In a note to clients, they said the Central Bank\u2019s reaction function has changed and has become \u201charder to infer.\u201d BTG believes qualitative judgment now carries more weight in the monetary authority\u2019s decision-making process, while projections provide less guidance on the next steps for interest rates.<\/p>\n<\/div>\n

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\u201cIt has become less clear what [level of] deterioration in projections, expectations, or core measures would lead the COPOM to stop the cycle,\u201d Berriel and Ferr\u00e3o said. That is because the current Selic-cutting cycle rests on two points: the extended period of monetary restriction and a greater qualitative assessment of how persistent the shock caused by the war in Iran will be.<\/p>\n<\/div>\n

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For Ian Lima, active fixed-income manager at Inter Asset, the Central Bank is trying to buy time to better understand the effects of the oil shock on Brazil\u2019s economy while preserving the easing cycle and signaling a bias toward further Selic cuts in upcoming decisions. \u201cBy continuing to ease, the Central Bank keeps the interest-rate market pinned down in some way. If it pauses the cycle, the market could flirt with a Selic hike, and that would tighten financial conditions, which it does not want to deliver. It is a bet, but it is easier than for other central banks in Europe and Asia,\u201d Lima said.<\/p>\n<\/div>\n

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Lima sees the impact of the war on Brazil as milder and says the Central Bank has \u201cfat to burn\u201d after raising the Selic to 15% last year, its highest level in almost two decades, and holding it there for nine months.<\/p>\n<\/div>\n

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\u201cSome say the increase to 15% was made precisely to put [interest rates] at a restrictive level beyond any doubt,\u201d Lima said. Brazil\u2019s real interest rate is now around 10%, well above most market estimates of the neutral rate, which stand near 6% to 7%.<\/p>\n<\/div>\n

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\u201cI think this slow cycle of cuts fits the current context. The COPOM has some fat and is burning it. If it had left the Selic unchanged at 15%, expectations would be rising because of oil, and it might have had to raise rates,\u201d he said.<\/p>\n<\/div>\n

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Room for cuts narrows<\/strong><\/p>\n<\/div>\n

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Still, the space for further Selic cuts has narrowed \u201csubstantially,\u201d said Aur\u00e9lio Bicalho, chief economist at Vinland Capital. He said the Central Bank is \u201cacting in a way that manages some of this uncertainty and tries to continue the cycle for some time.\u201d In the asset manager\u2019s monthly call, Bicalho said the Central Bank is likely to keep lowering the Selic at the current pace of 25 basis points until September.<\/p>\n<\/div>\n

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Although he agrees that monetary policy has been working to cool activity, a point emphasized by the Central Bank, Bicalho said that has never been used as a justification for easing interest rates. He noted that Brazil is part of a group of countries with high inflation, unanchored expectations, and credibility problems at the monetary authority, which should force the COPOM to pause the cuts before the last quarter.<\/p>\n<\/div>\n

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\u201cIt will have to stop [the cycle] because the inflation outlook is very unfavorable. The IPCA will move toward 5% this year and, if the Central Bank continues the cycle for much longer, inflation in 2027 will also be much higher,\u201d he said.<\/p>\n

* By\u00a0Gabriel Caldeira\u00a0and\u00a0Victor Rezende\u00a0\u2014 S\u00e3o Paulo<\/p>\n

Source: Valor International<\/p>\n

https:\/\/valorinternational.globo.com\/<\/p>\n<\/div>\n<\/div>\n<\/div>\n<\/div>\n<\/article>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Analysts say Central Bank is buying time after oil shock, but strategy may prove costly if inflation expectations keep drifting higher     05\/11\/2026\u00a0 The Central Bank\u2019s Monetary Policy Committee (COPOM) delivered an unusual decision in late April, cutting the Selic base rate by 25 basis points even as its inflation forecasts deteriorated for the […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[8106],"tags":[26917],"class_list":["post-98479","post","type-post","status-publish","format-standard","hentry","category-murray-news","tag-copom-rate-cut-clouds-view-of-reaction-function"],"yoast_head":"\nCOPOM rate cut clouds view of \u2018reaction function\u2019 - Murray Advogados<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/murray.adv.br\/en\/copom-rate-cut-clouds-view-of-reaction-function\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"COPOM rate cut clouds view of \u2018reaction function\u2019 - 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