Brazil, awaiting the first rate cut
6 FEB, 2026
By Mali Chivakul, Emerging Markets Economist at J. Safra Sarasin
Slowing growth has helped ease inflationary pressures
Brazil’s economy slowed in 2025. Although the latest economic activity indicator suggests a rebound in the fourth quarter, we still expect the moderation to continue, with annual growth closer to 2% this year, compared with around 2.5% in 2025. While the labor market remains tight, with the unemployment rate continuing to decline, inflationary pressures have eased.
Headline inflation reached 4.3% year on year in December, while the Central Bank of Brazil’s (BCB) Focus Survey suggests that inflation expectations for 2026 have fallen to 4%, from 4.1% at the beginning of December. Inflation expectations for 2027 remained unchanged at 3.8%.
The market has priced in the first rate cut in March
Conditions appear favorable for the Monetary Policy Committee (COPOM) to begin the rate-cutting cycle. However, the minutes of COPOM’s December meeting were rather hawkish, leading the market to price in the first rate cut only in March. The monetary policy report published last week suggests that the BCB remains concerned about tight labor market conditions and their impact on services inflation, which has remained elevated.
While goods prices declined, partly due to the appreciation of the Brazilian real (BRL), services inflation edged slightly higher in December, reaching 6% year on year (from 5.9% in November). We therefore expect COPOM to adopt a cautious approach and wait until March to deliver the first rate cut.
A moderate easing cycle is expected
We expect the rate-cutting cycle to be moderate, similar to that of 2023–24. The BCB’s latest inflation projections indicate that inflation should return to the 3% target in the first quarter of 2028, and that the neutral real rate is estimated at 5%. With the current policy rate at 15%, there is considerable room for easing, and the rate-cutting cycle is expected to continue through 2027.
We do not expect the easing to be more aggressive, as fiscal policy is likely to cushion the slowdown in an election year. As a result, we forecast total rate cuts of 350 basis points this year (50 bps at each of seven meetings starting in March). This is already higher than what is currently priced in by both the market and the Focus Survey (250–275 bps).
The Brazilian real and local-currency bonds remain attractive
Although rate cuts will reduce the carry of the Brazilian real, it remains the highest among major emerging markets. We continue to believe that the BRL and local-currency bonds remain attractive. Balance of payments data show that net foreign inflows into local-currency bonds have increased compared with last year. A more accommodative monetary policy and moderate inflation, against a backdrop of a weakening US dollar, should support the bond market.
Brazilian equities have outperformed
The equity market has also benefited from expectations of a rate-cutting cycle, a weaker dollar, and lower US interest rates. The MSCI Brazil index (in US dollars) gained 49.7% last year, compared with 33.6% for the MSCI EM index. Although net foreign inflows into equities were negative throughout 2025, the latest data suggest that foreign inflows were very strong in January, pushing the MSCI Brazil index up 15% year to date.
Despite higher valuations, diversification trends may continue to support Brazilian equities
Beyond macroeconomic factors, the Brazilian equity market also benefited from relatively low valuations at the beginning of 2025 (9.7x forward 12-month earnings versus 13.3x for MSCI EM). The recent rally has pushed valuations significantly higher, to 19.5x, compared with 16.7x for MSCI EM, and well above the historical average of around 10x.
Another key factor is that global investors are increasingly reallocating investments away from US markets, with surveys pointing to a broader shift beyond Asian emerging market equities, which account for 76% of the MSCI EM index. Unlike China, which is driven mainly by domestic policy, or Korea and Taiwan, which are driven by the global AI investment cycle, Latin American markets are heavily influenced by macroeconomic factors.
Volatility is likely to rise ahead of the October elections
Expectations of political change are likely one of the reasons behind the rally in Latin American equities. Chile is a good example, where the market has continued to rise as the new government has promised higher investment and corporate tax cuts. In Brazil, the latest polls show that President Lula is still leading, but Flávio Bolsonaro has made a significant recovery. The equity market saw a sharp correction when Bolsonaro announced his candidacy in early December, and we are therefore likely to see increased market volatility as the October elections approach.
