{"id":99067,"date":"2026-07-06T18:47:15","date_gmt":"2026-07-06T21:47:15","guid":{"rendered":"https:\/\/murray.adv.br\/?p=99067"},"modified":"2026-07-06T18:47:15","modified_gmt":"2026-07-06T21:47:15","slug":"oil-drop-gives-little-room-for-more-selic-cuts","status":"publish","type":"post","link":"https:\/\/murray.adv.br\/en\/oil-drop-gives-little-room-for-more-selic-cuts\/","title":{"rendered":"Oil drop gives little room for more Selic cuts"},"content":{"rendered":"
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Even with crude below policymakers\u2019 forecasts, markets see rates staying high amid fiscal concerns and unanchored expectations<\/strong><\/em><\/h6>\n<\/div>\n<\/div>\n
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The sharp drop in international oil prices, now hovering near levels seen before the start of the war in Iran, may not translate into much more room for monetary easing. Across the interest-rate market, Monetary Policy Committee (Copom) digital options, and economists\u2019 forecasts at major financial institutions, the prevailing view is that the Selic base rate is unlikely to fall much below 14% this year.<\/p>\n<\/div>\n

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Since mid-May, the link between oil prices and short-term interest rates has weakened. As investors reassess the Selic\u2019s path, other factors have gained weight as potential obstacles to deeper rate cuts: unanchored inflation expectations, still-high services inflation, and a more expansionary fiscal and credit policy backdrop, which has worsened perceptions of risk.<\/p>\n<\/div>\n

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That explains why short-term rates have remained elevated even after oil fell from more than $100 a barrel to $75. Crude is now below the Central Bank\u2019s own assumptions. In its Monetary Policy Report, the bank said it expected oil prices at $85 in the first quarter of 2027.<\/p>\n<\/div>\n

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\u201cThe relationship between the yield curve and oil was very strong, and then suddenly it started to break down. The curve shifted higher, and I think that reflects broader concern about the fiscal impulse. The market is very likely pricing in a significant impulse, which should not allow for many more cuts,\u201d said Fernando Gon\u00e7alves, head of economic research at Ita\u00fa Unibanco. He noted that the monetary authority included consumer stimulus in its balance of risks, which now has an upside asymmetry for inflation.<\/p>\n<\/div>\n

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In an outlook update published in late June, Ita\u00fa made a marginal change to its interest-rate forecasts and now expects only one more 25-basis-point cut in the Selic, which would end the year at 14%. \u201cWe saw a substantial drop in oil, but Copom itself shifted to a tougher tone on inflation, which suggests very limited room for cuts,\u201d Gon\u00e7alves said.<\/p>\n<\/div>\n

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Gon\u00e7alves raises another point: the fall in oil helps reverse part of the currency appreciation seen earlier, offsetting some of the disinflationary effect. \u201cWhen oil prices rose, Brazil\u2019s trade outlook improved, with more foreign currency entering the country, and the exchange rate appreciated. Now, as that move reverses, the expectation is that the trade balance will not be as strong as previously thought, and that pushes the dollar higher. There is some compensation, even if it is not complete.\u201d<\/p>\n<\/div>\n

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In practice, Gon\u00e7alves said, \u201cthere is less room for rate cuts.\u201d<\/p>\n<\/div>\n

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Limited easing<\/strong><\/p>\n<\/div>\n

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The Copom digital options market tells a similar story. At Friday (3)\u2019s close, the probability of a 25-basis-point Selic cut in August stood at 72%. But the likelihood that the easing cycle will continue beyond August is far from a consensus, despite the relief from oil prices. The probability of rates being held in September ended the week at 57%.<\/p>\n<\/div>\n

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The decline in oil may lead some market participants to revise their IPCA inflation forecasts, said Santander economist, Marco Antonio Caruso. \u201cThis is a debate that is gaining traction and could create a downside bias in the short term. We, for example, lowered our IPCA forecast for the year to 5% from 5.2%, partly because of oil,\u201d he said. Santander expects two more Selic cuts, in August and September, taking the benchmark rate to 13.75% by year-end.<\/p>\n<\/div>\n

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Beyond oil prices, Caruso said, Copom\u2019s latest communications suggest the committee sees monetary policy as already highly restrictive.<\/p>\n<\/div>\n

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\u201cAll this engineering around alternative Selic scenarios suggests to me that this is a Central Bank that, in fact, sees the degree of monetary tightening as much greater than the average analyst does. If that is true, there is a cushion. Even using some conservative assumptions, such as worsening [Central Bank\u2019s survey] Focus expectations and exchange-rate deterioration, it is possible to reach the Central Bank\u2019s 3.2% projection for the first quarter of 2028 [released in the Monetary Policy Report] with the Selic at 13.75%,\u201d Caruso said.<\/p>\n<\/div>\n

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Central Bank communication<\/strong><\/p>\n<\/div>\n

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The monetary authority\u2019s communication since the latest Copom decision continues to draw criticism from market participants, who see an implicit greater concern with activity than with inflation.<\/p>\n<\/div>\n

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\u201cLooking at what is written in the statement, the entire first section is consistent with a rate hike, not a cut. Even so, the Central Bank cuts the Selic\u2026 At the end of the day, the justification for the cut was very weak. Looking at the first quarter of 2028 because the model would indicate very abrupt volatility in macroeconomic variables\u2026 We are not talking about raising rates, but about keeping them unchanged. It left a very bad impression that, technically, the Central Bank brought elements that argued against cutting rates and still went ahead and cut,\u201d said Marcos De Marchi, chief economist at Oriz Partners.<\/p>\n<\/div>\n

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De Marchi said that, if oil continues to fall, part of the market may see room for the easing cycle to continue in August. \u201cBut since the start of the conflict, the government has tried to soften the pass-through from oil to consumers as much as possible. For that reason too, our inflation gain does not seem likely to be that significant, especially compared with what happens in the U.S., where pass-through is almost automatic,\u201d he said.<\/p>\n<\/div>\n

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Oriz still expects the Selic to remain at 14.25%. De Marchi also highlighted the widening \u201calligator mouth\u201d between oil and short-term rates. \u201cThat is because of fiscal issues. There is no way around it.\u201d<\/p>\n<\/div>\n

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De Marchi pointed to recent developments he sees as negative, suggesting there is little room for risk premiums at the short end of the yield curve to ease. In addition to bills moving through Congress that point to higher spending, De Marchi mentioned the Federal Court of Accounts\u2019 validation of public-policy operations outside the budget, which further weakens the Fiscal Responsibility Law, and Rio de Janeiro\u2019s debt renegotiation with the federal government.<\/p>\n<\/div>\n

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\u201cThe flow of news on public accounts is very poor. My scenario is still for the Selic at 14.25%, although the chance of one more adjustment has increased because of oil,\u201d he said. \u201cWe are in a dilemma: should I base my cycle forecast on what I think needs to be done, or on what the Central Bank indicates it would like to do? I prefer to keep a cautious stance.\u201d<\/p>\n<\/div>\n

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Long-term expectations<\/strong><\/p>\n<\/div>\n

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At Ita\u00fa, Gon\u00e7alves does expect some relief in short-term expectations because of oil, but he does not see that spreading to longer horizons. \u201cThe impact of oil on 2028 inflation tends to be smaller. When I look at the unanchoring of 2028 expectations, I see Focus trying to assess how credible it is that the Central Bank will reach the target. The fact that there has been a recent increase is a sign that the market sees it as less credible that inflation will get close to the target.\u201d<\/p>\n<\/div>\n

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For Gon\u00e7alves, a credibility issue has emerged \u201cand it has to do with the perception of a very expansionary fiscal policy at the moment, which signals that it will be difficult to make the necessary adjustment.\u201d<\/p>\n<\/div>\n

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In that sense, he said, the market has been seeing a more difficult fiscal adjustment, raising the prospect of pressured inflation and a Central Bank struggling to fulfill its mandate. \u201cThese expectations will not fall without a fiscal improvement, and that will not happen anytime soon.\u201d<\/p>\n

*By\u00a0Victor Rezende\u00a0and\u00a0Gabriel Roca\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":"

Even with crude below policymakers\u2019 forecasts, markets see rates staying high amid fiscal concerns and unanchored expectations       07\/06\/2026\u00a0 The sharp drop in international oil prices, now hovering near levels seen before the start of the war in Iran, may not translate into much more room for monetary easing. 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