Market finds itself under pressure with growing unease about inflation and interest rates

The Brazilian financial market suffered another negative day on Wednesday (3).

In the menu of investors' fears, ingredients already known from recent months continue to weigh on the stomach: uncertainties regarding the war in the Middle East and a global aversion to risk.

But an extra seasoning - and a reflection of the shock generated by the conflict - has gained more and more prominence in this dish: a growing unease about the country's inflation and interest rate expectations.

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"The economic environment ahead has been showing signs of deterioration with credit problems, and the fall in the Selic would help to get through this period. With the higher Selic, the economy should have a good hangover in 2027", points out Marcelo Fonseca, economist at CVPAR.

Amidst a more pressured inflationary scenario, a series of houses have rushed to revise their estimates for the basic interest rate, the Selic, at the end of this year.

Citi and Itaú started to project the Selic at 13.75% per year. Pine, XP and JPG already see interest rates at 14% or more at the end of 2026.

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"These revisions occur at a time of deteriorating inflation expectations, already incorporating the secondary impacts of the oil shock and the additional effects of El Niño, which add an upward bias to food at home. Furthermore, specifically today, the external market also shows greater aversion to risk, reinforcing the bad mood in local assets", ponders Gustavo Rostelato, economist at Armor Capital.

For 12 weeks, the Focus bulletin has been pointing out a sequence of increases in market expectations for inflation, which now sees prices rising by 5.09% in 2026, according to the BC (Central Bank) publication on Monday (1st).

The most recent to make a call review was BTG Pactual, which brings a drastic perspective: despite recognizing, considering its recent communications, that the BC should cut the Selic rate again by 0.25% at the next Copom (Monetary Policy Committee) meeting, it points out that the most prudent thing would be to immediately interrupt the downward cycle.

"This has happened due to several factors, but mainly due to the conflict. The market prices a delay in cutting interest rates, which causes investors to reduce their position in variable income", points out João Daronco, CNPI analyst at Suno Research.

With global risk aversion deteriorated by new attacks between the United States and Iran, the Ibovespa fell 2.22% in Wednesday's trading session, at 170,330.63 points.

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The spot dollar ended up 1.12%, quoted at R$ 5.0661; while oil prices closed up 2.4%.

Meanwhile, the discomfort with the deteriorated inflation and interest prospects, the war and the new US tariff against Brazil caused DI rates (Interbank Deposits) to close the fourth pre-holiday period with firm increases, above 30 basis points in some maturities.

"The interest rate curve captured this movement, since the market projects higher inflation and central banks need to be more aggressive. [...] This movement does weigh on the stock market, since the interest rate enters the cost account, reflects a reduction in revenue margin and generates strong aversion to risk. In this sense, the investor will prefer to make a profit and go to a more stable environment", explains Bruna Centeno, economist and partner at Blue3 Investimentos.

In addition to the impact caused by the conflict on prices, resilient economic activity can make controlling inflation even more difficult, increasing the likelihood of high interest rates for a longer period, ponders Fabio Louzada, economist and founding partner of B7 Business School.

"As a consequence, the interest curve advances in both shorter and longer maturities. And the prospect of high interest rates for longer also contributes to the strengthening of the dollar", he concludes.

High interest rates discourage consumption and can slow down the economy; understand

Source: CNN