Brazil Government Bond 10Y

Rabobank's Mauricio Une and Renan Alves expect the Brazilian Real to weaken into year-end after the Federal Reserve raised rates by 25 bps and signaled a more restrictive stance, while Copom cut the Selic rate to 13.75%. The Brazilian Real weakened slightly to BRL 5.1462 per USD but still outperformed most emerging peers.

Brazil's consumer price index for August, released on the 11th by the Brazilian Institute of Geography and Statistics, rose 4.22% from a year earlier, slowing from 4.44% in July. It also came in below the 4.27% forecast by economists in a Reuters poll, remaining within the central bank's target range of 3% plus or minus 1.5 percentage points. On a month-on-month basis, prices fell 0.32%, a steeper decline than the market's expected 0.29% drop and the largest negative reading since August 2022. Housing costs fell the most, down 1.87%, with lower electricity rates the main drag, while transport costs fell 0.86% and food and beverages fell 0.34%. Following the release, expectations grew that the central bank will cut rates again at next week's policy meeting. The central bank has so far delivered 25-basis-point cuts at four consecutive meetings, bringing its policy rate down to 14%.

The Brazilian Institute of Geography and Statistics (IBGE) reported on the 26th that the mid-August consumer price index (IPCA) rose 4.24% year-on-year, while falling 0.40% month-on-month. The monthly decline was the first since August 2025, signaling easing inflationary pressures. The annual rate slowed from July's 4.52% increase and came in below the median forecast of 4.34% in a Reuters poll. Within the central bank's target range, the monthly drop also exceeded the expected 0.30% decline. The downward factors included declines in housing costs of 1.41%, transportation of 1%, and food and beverages of 0.57%. The central bank this month cut its policy rate by 25 basis points to 14%, marking the fourth consecutive rate cut and leaving room for further easing. The next meeting is scheduled for September 15-16.

Brazil's services activity index was flat in June from the previous month, data from statistics agency IBGE showed on the 12th, beating the 0.2% decline expected by economists polled by Reuters. Analysts at JPMorgan said the data were more resilient than their traditional model suggested, reducing downside risks to growth and supporting their forecast that second-quarter gross domestic product expanded at an annualized pace of around 2%. Activity fell in four of the five sectors surveyed in June, but that was offset by growth in information and communication services. The index rose 2% from a year earlier, also above the 1.4% increase economists had expected. The central bank this month cut its benchmark interest rate by 25 basis points for a fourth consecutive meeting to 14%, while leaving its future policy path open.

Brazil's central bank unanimously decided to cut its policy interest rate by 0.25 percentage points to 14.00%, the lowest level since March 2025 and the fourth consecutive rate cut, in line with market expectations. It left the door open for further reductions at its September meeting, stating that the decision will depend on economic data received before the next meeting. The Monetary Policy Committee remains concerned about the persistent long-term inflation outlook breaching the target range, and reiterated that it is monitoring closely as this could make disinflation more economically costly. The central bank kept its 18-month policy horizon inflation forecast unchanged at 3.2%, while lowering its 2026 inflation forecast to 5.1% and raising its 2027 forecast to 3.8%.

Brazil's industrial production in June fell 1.8 percent from the previous month, marking the steepest decline since December 2025, according to the Brazilian Institute of Geography and Statistics. High interest rates continued to weigh on activity, and the result undershot the 0.8 percent drop forecast by economists polled by Reuters. Output declined across all four major surveyed sectors, with consumer goods posting the largest drag at a 3.7 percent decrease. On a year-on-year basis, production rose 1.7 percent, missing the 3.0 percent increase expected by economists. Andres Abadia, chief Latin America economist at Pantheon Macroeconomics, said Brazil's industrial sector is under pressure and the case for gradual monetary easing is strengthening. The Central Bank of Brazil is expected to deliver a fourth consecutive 25-basis-point rate cut on the 5th, bringing the policy rate to 14.00 percent.