Brazil Rates and the BCB: Selic, DI Curve, Fiscal — 2026-09-17
Brazil’s central bank (BCB) cut the Selic rate by 25 basis points to 13.75% on September 16, marking the fifth consecutive easing cycle as inflation cools. However, the committee left future guidance open, citing fiscal uncertainties and election risks that cloud the path for further cuts. Meanwhile, fiscal concerns intensified with new projections showing a potential R$86 billion primary deficit for 2027, contradicting government forecasts.
Brazil Rates and the BCB: Selic, DI Curve, Fiscal — 2026-09-17
Top developments
BCB Delivers Fifth Straight Rate Cut to 13.75%
On September 16, the Monetary Policy Committee (Copom) reduced the Selic base rate by 0.25 percentage points to 13.75% per annum, the lowest level since the easing cycle began earlier in the year. The decision aligns with market consensus as annual inflation eased to 4.22% in August, moving closer to the central bank’s target range. Despite the cut, the BCB explicitly stated it is not committing to a specific pace for future adjustments, signaling that the cycle could pause if inflationary pressures resurface or if global financial conditions tighten.
IFI Projects R$86 Billion Deficit for 2027, Contradicting Government
The Senate’s Independent Fiscal Institution (IFI) released a report on September 17 projecting a primary deficit of R$86.1 billion for 2027, significantly worse than the government’s projected surplus of R$18.6 billion. This divergence raises serious concerns about the credibility of the fiscal framework and suggests that spending blocks may be necessary to meet the primary target. The news adds pressure to the long end of the yield curve, as investors price in higher risk premiums for Brazilian sovereign debt amid pre-election fiscal expansion.
DI Futures Curve Steepens on STF and Fiscal Worries
Ahead of the Copom decision, DI futures rates rose, particularly at the long end, driven by renewed volatility surrounding the Supreme Court (STF) and global interest rate expectations. The curve steepened as investors demanded higher compensation for term risk, with the January 2029 contract seeing increased premiums. Following the Fed’s rate hike and the BCB’s cut on Wednesday evening, short-term rates aligned more closely with the new Selic level, while long-term yields remained sensitive to the fiscal narrative.
Lula Raises Welfare Benefits Ahead of Election, Pressuring Fiscal Outlook
President Lula announced an increase in welfare benefits just weeks before the October election, a move economists warn will exacerbate the fiscal deficit. This decision reinforces the narrative of pre-election fiscal loosening, contributing to the skepticism reflected in the IFI’s grim 2027 projections. Market participants view this as a direct challenge to the fiscal anchor, potentially limiting the BCB’s ability to deliver further rate cuts without triggering capital outflows or currency depreciation.
Local view
Local media outlets like Valor Econômico and O Globo highlight the tension between the BCB’s dovish stance and the deteriorating fiscal outlook. O Globo notes that while the Selic has fallen to 13.75%, the "Focus" survey still expects the rate to hold there until year-end, with only a gradual decline to 12% by 2027. Estadão reports that Treasury Direct (Tesouro Direto) yields for inflation-linked bonds (IPCA+) dipped slightly after the Copom decision, with the 2032 note falling to 7.61%, reflecting a temporary relief in real yields despite ongoing fiscal noise.
Context & numbers
- Selic Rate: Cut to 13.75% p.a. on Sept 16, 2026.
- Inflation (IPCA): Annualized rate of 4.22% in August 2026, down from 4.44% in July.
- Fiscal Deficit (2027 Projection): IFI projects -R$86.1 billion vs. Government’s +R$18.6 billion surplus forecast.
- Market Expectations (Prisma Fiscal): Median estimate for 2026 primary deficit improved to -R$52.3 billion from -R$59.1 billion in August.
- DI Futures (Jan 2027): Traded around 13.63% prior to the Copom decision, reflecting expectations for further cuts or stable rates at current levels (Note: Specific post-cut closing data for Jan 2027 not explicitly detailed in fresh snippets, but curve steepening noted).
On the radar
- Copom Minutes: Release of the detailed minutes from the September 16 meeting will be scrutinized for clues on whether the "neutral" stance implies a pause or continued easing.
- October Election: As the first round approaches, polling data and campaign promises regarding fiscal spending will likely drive volatility in the DI curve and the Real.
- NTN-B Auctions: Upcoming Treasury auctions for inflation-linked bonds will test investor appetite for real yields above 7% given the rising fiscal risk premium.
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