Falling Inflation Changes the Outlook for Interest Rates and GDP?

The Focus Report released by the Central Bank on Monday brought the second consecutive downward revision in inflation expectations for 2026. The projected IPCA fell from 5.30% to 5.16%. It's a marginal relief, but it carries an important message for those monitoring the Brazilian monetary cycle.

The trigger was the IPCA for June, which rose only 0.16%, slowing down compared to the previous month. Over the past 12 months, the index dropped to 4.64%. Still above the ceiling of the target of 4.50%, but moving in the right direction.

The market interpreted the numbers as a sign that the ongoing monetary tightening is starting to have an effect on prices. The question now is whether this movement has the momentum to continue or if it is just a seasonal breather.

Selic Stuck at 14% Even with Inflation Easing
Despite the improvement in the inflation scenario, economists consulted by the Central Bank did not change the projection for the Selic at the end of 2026. The rate remains at 14%, the highest level since the tightening cycle of 2015-2016.

The maintenance of the expectation is not surprising. A drop of 0.14 percentage points in the projected IPCA is insufficient for the Monetary Policy Committee (Copom) to signal cuts in the short term. The Central Bank has emphasized that it needs to see a consistent convergence of inflation to the target before initiating any easing.

For the following years, the scenario outlined by Focus shows a gradual downward trajectory: 12% in 2027, 10.50% in 2028, and 10% in 2029. This pace implies a slow cycle of cuts, likely starting only in the second half of 2026 or early 2027. Those investing in fixed income and interest-linked assets need to calibrate expectations for a prolonged period of high rates.

Stagnant GDP Near 2% Per Year Raises Concerns
If inflation brought some optimism, economic growth remains a point of concern. The projection for GDP in 2026 remained unchanged at 1.99%. For 2027, there was even a downward revision from 1.69% to 1.65%.

The number is revealing. With the Selic at 14%, the cost of credit compresses consumption and investment. The result is an economy that grows below its estimated potential, which ranges between 2.5% and 3% per year according to most models.

This combination of inflation still above the target with modest growth sets up what some economists call "soft stagflation." There is no technical recession, but there is also not enough dynamism to generate real income or employment gains sustainably. As we analyzed in a recent article on the impact of high interest rates on investments, this scenario requires selectivity in capital allocation.

This week, the market is watching the release of the IBC-Br on Friday, an indicator from the Central Bank considered a preview of GDP. The data may provide clues about the real speed of economic slowdown in the second quarter.

Stable Dollar and What It Says About Brazil's Risk
The projected exchange rate for the end of 2026 remained stable at R$ 5.20, with a trajectory of gradual depreciation in the following years: R$ 5.28 in 2027, R$ 5.34 in 2028, and R$ 5.40 in 2029.

The stability of the projected dollar contrasts with the volatility observed in global markets. The favorable interest rate differential for Brazil, with the Selic at 14% against lower rates in developed economies, continues to attract short-term capital and sustain the real.

However, the projected depreciation for the coming years indicates that the market is pricing in a gradual deterioration in external accounts or a reduction in this interest rate differential as the Selic falls. This is a relevant factor for those assessing exposure to dollar-denominated assets as part of a diversification strategy.

What the Focus Numbers Mean in Practice
The picture drawn by the market is one of incremental adjustment, not a turnaround. Inflation eases at the margins, but has not yet converged to the target. Interest rates remain high. Growth is stagnant. The exchange rate remains relatively stable.

For the investor, the message is one of patience. Post-fixed income continues to offer attractive real returns with the Selic at 14%. Inflation-linked securities, such as Tesouro IPCA+, remain a relevant protection while the accumulated IPCA remains above 4.5%.

For variable income, the scenario is more ambiguous. High interest rates for a longer time compress valuations and limit risk appetite. But sectors less dependent on credit and with dollarized revenue tend to benefit from exchange rate stability.

This week's Focus reinforces a pattern that has been consolidating: Brazil is going through a cycle of adjustment that will be long and gradual. There are no shortcuts. Inflation needs to convincingly ease for interest rates to start falling, and interest rates need to fall for GDP to grow vigorously again.

The second consecutive downward revision in the IPCA is a step in the right direction. But it is just a step. The market knows this, and that is why the other variables in Focus remained practically unchanged.

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