BCB cuts Selic rate to 14.25%; inflation above target

Brazil's consumer inflation (IPCA) rose to 4.72 percent in May, up from 3.81 percent in February, exceeding the 4.50 percent upper tolerance limit of the target.

The average of core inflation measures also increased to 4.52 percent.

All IPCA segments showed high variations, particularly food at home and administered prices.

Despite these pressures and unanchored inflation expectations, the Monetary Policy Committee (Copom) decided to reduce the basic interest rate, Selic, to 14.25 percent per year.

This decision was made in an environment of accelerating economic activity, with GDP growing 1.1 percent in Q1 2026, and a resilient labor market.

However, the external environment remains uncertain due to ongoing conflicts in the Middle East, impacting global asset and commodity prices.

Brazil's continuous inflation targeting regime, in place since January 2025, sets a 3.00 percent target with a +/- 1.50 percentage point tolerance (1.50%-4.50%), verified monthly.

Current projections indicate inflation will rise to 5.2 percent by the end of 2026, remaining above the upper tolerance limit for more than two consecutive quarters.

It is then projected to decrease to 3.1 percent by Q4 2028.

The projected inflation for the relevant policy horizon (Q4 2027) is 3.7 percent, a 0.5 percentage point increase from the previous report.

This significant rise is driven by the IPCA surprise, a higher estimated product gap, increased oil and commodity prices, and elevated inflation expectations.