Weekly Report 125
In monetary policy, COPOM maintains a hawkish tone and reiterates its commitment to bringing inflation back to target. The minutes of the July meeting reiterated the core message from the previous statement, confirming the end of the tightening cycle, but maintaining a hawkish tone by emphasizing that the Committee’s projection for the relevant horizon (3.4% in 1Q27) remains above the inflation target. This, it argued, requires keeping interest rates at a high level for longer to ensure convergence. Inflation expectations remained above target across all horizons, despite declines in market-implied measures, and current inflation showed easing in industrial goods and food prices, but persistent pressures in services, consistent with a positive output gap.
Given a stronger currency and faster disinflation in industrial goods, we now expect the start of the rate-cutting cycle in January 2026, from April previously. In light of recent wholesale price dynamics and their pass-through to consumer inflation, we have incorporated a more benign path for industrial goods and food inflation, lowering our 2025 IPCA forecast from 5.2% to 4.8%. Considering the seasonal deterioration in FX flows during the second half of the year, we see the current exchange rate, now around BRL 5.40 per USD, depreciating to approximately BRL 5.65 (vs. BRL 5.75 previously). Although the final calibration of our activity outlook will follow the release of consolidated June data, we recognize downside risks to our growth forecast, which contribute to output gap closure and reinforce the case for beginning monetary easing in January. In the external scenario, new trade tariffs take effect and Trump nominates Stephen Miran to the Fed. The new trade tariffs announced by Donald Trump came into effect midweek, impacting a broad range of countries and products. Beyond the measures previously disclosed, the president announced an additional 100% tariff on imported semiconductors, as well as the unexpected taxation of 1kg gold bars. In addition, President Trump announced he will appoint Stephen Miran, currently head of the White House Council of Economic Advisers, to temporarily occupy a seat on the Federal Reserve Board of Governors until January. Miran’s nomination reinforces the White House’s direct influence over the conduct of monetary policy and intensifies the debate over the Fed’s independence, at a time when the central bank faces the challenge of balancing political pressure, market expectations for rate cuts, and the need to preserve its credibility in containing inflation.Read our full report ⬇️
