BC warns of the effects of fiscal policy on inflation and interest rates in Brazil

In the announcement of the decision that reduced the Selic rate to 14.25% per year this Wednesday (17), the Copom (Monetary Policy Committee) of the BC (Central Bank) once again warned of the impact of domestic fiscal policy on the conduct of monetary policy, and on the balance of risks of high inflation.

"The Committee continues to monitor how developments in domestic fiscal policy impact monetary policy and financial assets, reinforcing the cautious stance in a scenario of greater uncertainty."

The board confirmed market expectations of reducing the base rate by 0.25 points - the third consecutive drop of the same magnitude.

The Copom also pointed out that economic activity indicators show recovery in relation to the last quarter of 2025, "remaining consistent with a slowdown trajectory in 2026, while the scenario continues to be marked by unanchored expectations, high inflation projections, and pressures in the labor market".

At the last meeting, at the end of April, the Committee had already made the same warning. However, in this Wednesday's statement, the Copom included the possible stimulus to consumption generated by fiscal policy decisions in the balance of risks of high inflation.

For the Committee, the risks to inflation, both upward and downward, remain higher than usual.

Among the highlights of the upside risks to the inflationary scenario and inflation expectations, the BC cited "a conjunction of external and internal economic policies that have a greater inflationary impact than expected, for example, through a persistently more depreciated exchange rate".

They also point out "stimuli to aggregate demand, in particular to the consumption component, which results in growth in economic activity above potential output, weakening part of the usual monetary policy transmission channels".

Source: CNN