The slowdown in economic activity and the exorbitant cost of financing Brazil's trillion-dollar public debt, which burdens government accounts, are working in favor of an interest rate cut by the Central Bank (BC) on Wednesday, January 28. However, the resilience of inflation expectations – below the target ceiling, but well above 3% – weighs in favor of maintaining the Selic rate at 15% per year until March.
Combined, these conditions explain the divergent opinions among economists heading into the first meeting of the Monetary Policy Committee ( Copom ) in 2026, amidst a local agenda congested by the release of reports on external operations, credit and fiscal policy prepared by the Central Bank, labor market data monitored by PNAD and Caged, and a preview of January's inflation – the IPCA-15.
In the international economic agenda, the focus will be on the Federal Reserve's (Fed) decision regarding its benchmark interest rate. In a meeting coinciding with the Copom (Brazilian Central Bank's Monetary Policy Committee) on Wednesday, the 28th, the US central bank is expected to maintain interest rates in the range of 3.50% to 3.75%. The expansion of the US GDP in the third quarter, of 4.4%, announced on Thursday the 22nd, even reduces the need for an interest rate cut. However, both governments would like to cut the cost of money. An unlikely action in both cases. Central banks are resisting.
There is no doubt that the Brazilian interest rate, at 10% real, is having an effect, paving the way for monetary easing. But will the gradually weakening economic activity be enough to lead Gabriel Galípolo's Central Bank to begin the cycle of Selic rate cuts? After all, the government is "playing against itself" with fiscal expansion to support the demand for goods and services – a sector that exhibits resistant inflation and has powerful support in the growth of labor income and social programs, with a reversal unlikely in this election year of 2026.
In its decision and statement on Wednesday, the Copom will have the opportunity (again) to state its position. For now, market opinion reflected in the latest Focus survey, from January 19, continues to show stability in the Selic rate this month, with the first reduction, according to the survey, occurring in March by 0.50 percentage points.
4intelligence notes that the total adjustment to the Selic rate in 2026 remained at 2.75 percentage points. However, the median of the projections updated in the last five days points to an adjustment of 3 points – in which case the Selic rate at the end of December would fall to 12%, and not to 12.25% if this last-minute estimate prevails.
In the current cycle of rising Selic rates, which began in September 2024, interest payments increased from R$ 819.7 billion over 12 months to R$ 918.2 billion last November – the latest data published by the Central Bank. During this period, the amount reached a maximum of R$ 987.2 billion, or 7.88% of GDP, in October 2025. This figure is equivalent to almost six years of payments for Bolsa Família, the flagship of the government's social programs, for which R$ 158 billion is allocated in this year's budget.
Direct and indirect impact of the Selic rate on the moon
To describe the effects of the exorbitant base interest rate practiced by Brazil , NeoFeed interviewed Alexandre Seijas Andrade, director of the Independent Fiscal Institution (IFI), linked to the Senate and part of the OECD's network of independent fiscal institutions.
Public finance expert Andrade observes that maintaining the Selic rate at such a high level for so long tends to significantly cool the economy by inhibiting household consumption and increasing default rates on credit operations. This argument also applies to productive investments.
“Business owners will think twice before borrowing money to finance projects,” says the economist, reinforcing the principle that the role of monetary tightening is indeed to cool down activity and promote the convergence of inflation to the target. “In 2025 we still saw the economy moving at a very favorable pace in the first half of the year. But in the second half, the weakening was explicit and this should continue in 2026.”
Not surprisingly, growth projections for 2026 remain below 2% and have just received an addendum. The International Monetary Fund has reduced its estimate for Brazilian GDP growth this year from 1.9% to 1.6%. This variation is lower than that shown in recent editions of the Focus and Firmus surveys – projections of indicators collected from institutions and companies monitored by the Central Bank.
Both surveys – the weekly Focus survey and the quarterly Firmus survey – predict growth of 1.8% this year. This is a decline compared to the approximately 2.2% expected for 2025, "when fiscal policy was in expansionary territory, although lower than in the previous two years," notes Andrade, who warns that the direction of fiscal policy is more relevant than a single number. "And the direction remains positive and stimulative," he informs.
He points out that the high Selic rate impacts economic activity and fiscal policy because it is the benchmark interest rate and therefore has a direct and indirect effect on public debt.
"The government spends more than it collects and needs to issue bonds to raise funds in the market. Today, about 50% of the public debt stock corresponds to Treasury Financial Bills (LFTs) remunerated by the Selic rate. The remainder is represented by inflation-linked and fixed-rate bonds. The Selic rate affects issuances and the stock because the LFT has a post-fixed payment."
The indirect effect of the Selic rate is on expectations, says Andrade. “The Central Bank can raise the Selic rate to bring inflation to the target, due to fiscal imbalances, or even due to distrust among economic agents in the government's ability to maintain fiscal discipline. The result: this distrust affects long-term interest rates, which directly influence the pricing of Treasury bonds. Therefore, it is crucial for the Central Bank to coordinate expectations to avoid contamination of longer-term interest rates, which, if pressured, further aggravate government debt.”
