Global uncertainty caused by the oil price shock and the volatility provoked by tariff policies and the lack of clarity regarding the peace agreement with Iran on the part of US President Donald Trump are leading the market to focus in the short term on the possibility of interest rate hikes in the US.

In this scenario, Brazilian macroeconomic instability—whether due to the risk of increased inflation from fiscal spending or the tension surrounding the presidential election—is, for now, taking a back seat on investors' radar. Not even a possible re-election of President Luiz Inácio Lula da Silva is alarming, as investors know what to expect from his administration.

The diagnosis comes from David Beker , Head of Economics in Brazil and Strategy for Latin America at Bank of America .

"The market has been misreading the global macroeconomic impacts caused by the volatility of the oil shock, which makes it difficult to devise a strategy for assets," Beker said on Friday, July 3, at a meeting with journalists at the bank's headquarters in São Paulo.

According to him, the expectation of a large part of the international market was for an increase in interest rates by the Federal Reserve (Fed), the US central bank, because of the oil shock. Price pressure on American inflation, coupled with robust US economic activity and the tougher (“hawkish”) rhetoric of Kevin Warsh , the new Fed chairman, reinforced this certainty.

However, the price of oil has fallen more rapidly than expected in recent days, and the recently announced reduction in US job market hiring – 50% lower than the Fed's estimate – could reverse this expectation.

Bank of America (BofA), in fact, predicted three 0.25 percentage point Fed interest rate hikes starting in September, above market estimates. Baker says the bank maintains its forecast, although he acknowledges that the data, for now, points in the opposite direction: "The structural risk to oil prices is downside, but there is a risk that the war will continue to cause sharp fluctuations," he said.

Beker warns that this scenario of international volatility has a double impact on Brazil. On the one hand, the uncertainty diverts attention from Brazilian macroeconomic instability, which is beneficial in the short term.

On the other hand, however, the country could become even more vulnerable. If the Fed delivers on the three interest rate hikes, for example, the impact would be particularly negative for emerging markets, via a stronger dollar. Furthermore, the eventual drop in oil prices – if confirmed – could help contain American inflation.

In this scenario, the Fed may abandon plans to raise interest rates, and the stock market should continue to attract investors eyeing the appreciation of technology companies due to AI, which should discourage investments in emerging markets.

Interest rates stagnant

BofA predicts that the Brazilian Central Bank should maintain the Selic rate at 14.25% per year until December, although the market is beginning to question this decision in light of the fall in oil prices, slightly better-than-expected inflation , and weaker economic activity.

“The Central Bank cut 0.25 percentage points when some believed there was no room for it; the extension of the relevant horizon and the change in the balance of risks should be interpreted as the Central Bank calibrating to allow for a marginal cut if the data supports it, without altering the structural trajectory,” Beker emphasized.

Bank of America (BofA) forecasts four 0.25 percentage point cuts in the second half of 2027, bringing the Selic rate to 13.25%; and four more 0.25 percentage point cuts in 2028, potentially bringing interest rates to 12.25% per year. GDP is expected to grow 2.3% this year, and inflation, according to the bank, should close 2026 at 5.5%. For 2027, BofA revised its inflation forecast from 4.1% to 4.7%.

"Two significant risks were not fully incorporated into the inflation calculation: El Niño, which in the worst-case scenario could add 180 percentage points to inflation over 12 months; and the PEC 6x1 amendment, whose impact we have not yet calculated," the economist stated.

Although he emphasizes that the Brazilian government's fiscal policy is perceived as expansionary, Beker believes that some adjustment is considered inevitable after the elections, even with the re-election of the current government.

"In this case, we foresee a re-evaluation of health/education spending floors, a review of tax benefits, with a specific focus on social programs; the question is what the magnitude of this adjustment will be," he stated.

According to him, the Lula government has some advantages in the perception of foreign investors. One of them is that, in a global comparison, these investors downplay Brazil's fiscal problems, since "everyone has bad fiscal policy"; however, debt/primary surplus levels are a concern if they persistently rise.

Furthermore, the BofA executive dismissed fears of a possible Lula reelection, at least at the pre-election level for 2022. "Foreign investors aren't afraid of Lula; they already know what to expect."

In any case, BofA believes that any impacts from the national macroeconomic scenario should only be greater in the second half of the year, when the election campaign takes off. "We don't even have presidential candidates defined yet," he said.

According to BofA, the Brazilian stock market lacks clear triggers for a sustained rise. Profit expectations for next year, excluding commodities and banks, exceed 40%, anchored in lower financial expenses and higher growth — assumptions currently pressured by smaller interest rate cuts and downwardly revised activity, implying a "downside" risk.

“Despite the correction, the market is not at a “bargain” level; foreign investors remain the main driver and have been reducing their positions,” Beker noted.

According to him, the domestic fund industry is experiencing average weekly redemptions of R$ 500 million in equity funds. The funds are primarily migrating to fixed income (CDBs, LCIs, LCAs, Treasury bonds).

"Credit funds have seen outflows in the last two months, not yet large, but corporate defaults (3.7%, the highest since 2017) are a point of concern, especially if high interest rates persist, increasing the risk of credit events," he concluded.