Brazil's "protected" stance paves the way for a Selic rate of 12%, says Morgan Stanley's chief economist.

The consensus among economists for the Wednesday, April 29th meeting of the Monetary Policy Committee (Copom) was for a 0.25 percentage point (pp) cut in the Selic rate – which indeed occurred – bringing it to 14.50% per year. The American bank Morgan Stanley shared the same view.

But, starting with the next meeting of the Central Bank committee in June, chief economist Ana Madeira projects a cycle of 0.5 percentage point cuts, which will bring the benchmark interest rate to 12% by the end of the year. "The alternative of not cutting would require extreme conditions that are not occurring," she says in an interview with NeoFeed .

The Portuguese economist, who has a long career at Bank of America in São Paulo and, more recently, as chief economist at HSBC in Brazil, believes there is a strong possibility that the Copom (Monetary Policy Committee) will announce cuts of 0.5 percentage points starting at the next meeting due to the low impact of the oil shock on the country, especially on inflation.

“Brazil is relatively protected, as there is fiscal space to cushion the shock and Petrobras' pricing policy dilutes volatility over time,” says Madeira. “The biggest risk, in terms of inflation for Brazil, is concentrated in the second half of the year.”

Madeira praises the Central Bank's handling of monetary policy, resisting market pressure at the end of 2025 to begin the Selic rate cut cycle, which only occurred in March. Even the fact that the Central Bank conducted the interest rate cut cycle amidst a complex international scenario and a national one with a presidential election in the second half of the year is not expected to have any significant impact.

“Fiscal constraints are tighter now,” says the economist. “Apart from a surprise, our expectation is that the government will indeed be able to deliver something very close to the primary deficit target for this year.”

Read below the main excerpts from the interview:

How do you assess the Central Bank's conduct of monetary policy since the beginning of the Selic rate cut cycle?
The Central Bank acted calmly and cautiously when it began cutting the Selic rate, resisting market pressure at the end of 2025. This stance helped to re-anchor inflation expectations, which were well above the target. After the Monetary Policy Committee (Copom) signaled the start of the rate-cutting cycle for March, the geopolitical crisis in Iran occurred. The Central Bank, then, citing the uncertainty of the future scenario, acknowledged that there was room to begin a calibration cycle.

What is the difference between a calibration cycle and an interest rate cut cycle?
The difference is that, at the end of this calibration process, the expectation is that interest rates will still remain in contractionary territory. This expectation existed because the Central Bank realized that, this time, it would take a little longer for inflation to converge to the target. In other words, it would need an interest rate that remained contractionary for a longer period than normal. In the meantime, then, came the beginning of the cuts.

Did the Central Bank take too long to begin the cycle of cuts?
There was no delay, as the negative surprises in economic activity only appeared in February 2026, which justified waiting to maximize the effect on expectations. This interpretation by the Central Bank was in line with our macroeconomic scenario. Here at Morgan Stanley, the assessment was that at a time when inflation expectations are unanchored, a central bank that surprises on the hawkish side, with a stance of combating inflation through interest rate increases, has more to gain than on the dovish side ( marked by interest rate reductions) . Although the initial plan was to cut 50 basis points, geopolitical uncertainty led the Central Bank to adopt a more cautious cut of 25 basis points.

What were your expectations for today's meeting?
Our expectation was for a 25 basis point cut in the Selic rate, in line with the market. The risk of a different decision was very low, given the signals of the calibration cycle in recent communications. The alternative of not cutting would require extreme conditions that are not occurring.

"A larger cut [in the Selic rate] should come with some improvement in the external scenario, with the price of oil sustainably starting to reach levels below US$100 a barrel."

What is needed to increase the pace of cuts?
A larger rate cut should come with some improvement in the external scenario, with the price of oil sustainably starting to reach levels below US$100 per barrel. Therefore, we see room for the Central Bank to implement a 0.25 percentage point cut until the next meeting in June, so that the external scenario improves and it begins to consider cuts of 0.5 percentage points in the second half of the year. If the external scenario does not improve, the risk for the Central Bank is delivering a smaller rate cut cycle this year, with a continuation of the 0.25 percentage point cut. We believe that the bar for halting the cuts remains very high.

Does Morgan Stanley also anticipate this series of cuts?
Although the risk for today's meeting was low, the June call is higher. Even so, we believe in cuts of 0.5 pp in the Selic rate starting in June and continuing until December, which would bring the Selic rate to 12% by the end of 2026.

What justifies Morgan Stanley's more positive outlook on the Selic rate cut cycle, given that the oil shock caused by the war has the potential to increase inflation and affect the Central Bank's room for maneuver?
Brazil is relatively protected, as there is fiscal space to cushion the shock, and Petrobras' pricing policy dilutes volatility over time. The greater risk, in terms of inflation for Brazil, is more of a second-order risk, concentrated in the second half of the year. In our view, the Central Bank's reaction to this shock will be driven more by the behavior of inflation expectations: not so much by the reaction of inflation expectations for 2026, but more by the reaction of expectations for 2027 and 2028, that is, more long-term expectations.

Besides the uncertain external environment, could the fact that Brazil will have presidential elections in the second half of the year interfere with the Central Bank's monetary policy?
The question is whether the election will impact inflation expectations and economic growth. Right now, we have a presidential race that is very polarized. Political analysts expect this polarization to persist until practically election day. If this is confirmed, it may not be a very impactful factor in influencing inflation expectations between now and election day. That said, we don't expect the election to be a determining factor in the conduct of monetary policy.

"The question is whether the election will impact inflation expectations and economic growth. Right now we have a presidential race that is very polarized."

Could the possibility of the government adopting a looser fiscal policy in the second half of the year due to the election derail the direction the Central Bank has been taking?
Fiscal constraints are tighter now. Aside from being a surprise, our expectation is that the government will indeed manage to deliver something very close to the primary deficit target for this year. So, at this moment, fiscal policy is not something that worries us in terms of having such a large impact on activity. The Central Bank will continue to monitor the responses vis-à-vis inflation expectations and vis-à-vis economic activity.

And what are your expectations for economic activity?
We believe in GDP growth of 2% for this year. We don't see any risk of it being weaker than that. Current political noise, such as the Master case, or fiscal policy issues, end up being relevant for the Central Bank depending on whether or not they affect variables like the exchange rate, which is normally sensitive to this type of noise.

Are you concerned about the exchange rate?
No, the exchange rate is behaving very well. In fact, the exchange rate is one of the factors that might help a little to avoid such a significant increase in inflation, especially when we have current inflation already rising and we see expectations of secondary effects emerging.

Is it surprising that a global geopolitical crisis coupled with internal uncertainty surrounding the presidential election would ultimately have a smaller impact on the Brazilian economy than expected?
Brazil is an energy exporter. So, ultimately, the country benefits in terms of trade and current account. And it also benefits fiscally, because the country has several revenues that are directly linked to the price of oil. At the same time, Brazil is a large but relatively closed country.

What does this mean?
Although it doesn't benefit as much from, for example, global positive trends, it ends up being somewhat more protected from negative ones. So, in that sense, Brazil is in a slightly more favorable position, especially compared to other countries. Asset prices clearly reflect this.