The war presents a dilemma for the Central Bank: cut interest rates or be complicit in "regression"

Major banks have been accurate in predicting a slowdown in GDP growth from 3.4% in 2024 to 2.3% in 2025, and are expected to correct their projections for this year, which currently range between 1.5% and 2%. Banco do Brasil predicts 2%; Itaú, 1.9%; Bradesco and Santander, 1.5%. If this weakening is confirmed, the economy risks returning to the post-Dilma Rousseff level – the period between 2017 and 2019 when GDP grew by an average of 1.44%.

The setback could be contained, however, if the government continues to fund or expand income transfers and if the interest rate cut signaled by the Central Bank takes effect. By maintaining the Selic rate at 15% since June 2025, it imposed strong financial constraints but obtained "dividends": current inflation and expectations slowed down. The 3% target , however, remains distant in all readings. And it still demands an effort from the institution.

Despite the changing scenario, which now includes the conflict in the Middle East , Focus indicates the start of the Selic rate cut cycle at the Copom meeting on March 18th, with a 0.50 percentage point reduction, followed by four other identical cuts and two more of 0.25, totaling 3 points or a final Selic rate of 12%.

Out of caution, the Copom (Monetary Policy Committee) may make a smaller cut in the rate. And if the market has altered its forecast, the Focus report, released on Monday the 9th, will confirm it. But the reduction of the Selic rate takes on a new dimension amidst the economic war and imposes a dilemma on Gabriel Galípolo's Central Bank – to maintain or alter the flight plan? And for an obvious reason: inflation. The Central Bank's mandate is to pursue the target.

Whether the conflict pushes the commodity price even higher or stabilizes it at a high level, the repercussions are certain. After spending days around US$82 a barrel of Brent crude , up 13% since the outbreak of the war, on Friday the commodity was already above US$87.

If external pressure persists, Brazil will be no exception to global inflationary pressure, even if it succeeds in exporting eventually more expensive oil, which also translates into an improved trade balance and higher tax revenue. However, the effect on domestic inflation will, in practice, depend on Petrobras, which may (or may not) correct the gap in fuel prices compared to international parity.

Data from the Brazilian Association of Fuel Importers (Abicom) reveals that from Monday, March 2nd, to Thursday, March 5th, the price discrepancies increased. Diesel, which was quoted 23% below parity, began to be traded at 47% less. And the discrepancy in gasoline went from 17% to 19%. The oil company may hold the reins. But for how long without harming its shares?

Bruno Imaizumi, an economist at 4Intelligence, notes that Petrobras doesn't make decisions overnight. This is partly because the company needs to eliminate price volatility in the market.

Speaking to NeoFeed , he recalls that since 2020, Petrobras has allowed the price of diesel to lag further behind that of gasoline. This option may persist, says the economist, who believes that in an election year, the diesel price adjustment enters a delicate area because an increase would affect road transport, trucking groups, and even food production – which is sensitive to transportation costs.

Imaizumi sees a gasoline price adjustment as more likely, but not immediately. He comments that when the Russia-Ukraine conflict broke out, Petrobras readjusted gasoline prices by 19% and diesel by 25% after two weeks. “But the situation was different. Global supply chains were misaligned due to the pandemic. This time, that condition doesn't exist.”

Risks of conflict: inflation and global uncertainty.

Regarding the effect of fuel price increases on inflation, Imaizumi calculates that a 10% rise in gasoline, gas, and diesel prices would increase the IPCA (Brazilian consumer price index) by 0.2 percentage points in 2026 and wholesale prices by 0.6 points. However, in the case of a prolonged conflict, other "prices" could weigh in.

It's not just oil that's weighing on prices, he points out. “Fertilizers are already on the radar and, further down the line, could affect food prices. We're also seeing a search for safer assets for hedging, and we're monitoring the devaluation of the real, which is already around R$ 5.30. And that wasn't what was happening in recent weeks. Depending on how the exchange rate evolves, other prices could be affected. The Brazilian economy is heavily dollarized,” the economist observes.

Inflation, now closely monitored, will be one of the highlights of the economic agenda that will conclude the first half of March. February's IPCA (Consumer Price Index) will be released on Thursday the 12th, and IBGE (Brazilian Institute of Geography and Statistics) will also publish retail sales and services figures for January on Wednesday the 11th and Friday the 13th, respectively.

For the February IPCA (Brazilian consumer price index), economists are counting on pressure already anticipated by the IPCA-15, which surprised with a 0.84% increase in the month, compared to the projected 0.60%. "The surprise came in airfares and auto insurance," says Imaizumi, who predicts a higher IPCA in the monthly variation, 0.61%, and 3.72% over 12 months.

In addition to inflationary pressure, growing uncertainty is another consequence in markets that have withstood effective or potential US military interventions in Venezuela and Greenland, according to Ibiuna Investimentos, led by former central bank executives and partners Mário Torós and Rodrigo Azevedo, who believe that Iran further complicates scenario planning.

In the letter “Perspectives for March 2026”, the asset manager highlights the surprising contrast, in the first two months of the year, between greater economic and geopolitical uncertainty versus the strong performance of low-volatility risk assets. A significant oil shock could alter this picture, acknowledges Ibiuna, which expects, however, a temporary impact on oil prices.

But managers warn that the environment could change with increased global risk aversion. "Until now," they recall, "Brazil has been one of the beneficiaries of the most benign capital flows, despite the country facing events that have increased uncertainty: erosion of the judiciary's credibility, division of the right wing in the presidential campaign, and fiscal deterioration."