The Central Bank of Brazil has kept the Selic rate steady at 15%, which matches expectations. This unanimous decision reflects the bank’s cautious approach toward inflation, aligning with a recent Reuters poll. The bank has removed language about “continuing the interruption” of rate hikes. They emphasized the need to stay vigilant in assessing whether the current rate effectively controls inflation. Future policies may change, with possible rate increases if necessary.

Inflation Challenges

The bank acknowledged that U.S. tariffs and local fiscal policies might impact monetary conditions. Inflation expectations are still unstable, which may require a strict stance on rates for an extended time. Projections show high inflation pressures due to strong economic activity and a vibrant labor market. An uncertain global climate, affected by U.S. policies, makes the outlook more complicated. Despite slower growth, the job market remains robust. Both headline and core inflation are above targets, with significant risks impacting inflation from multiple directions. With the central bank deciding to maintain the Selic rate at 15% and adopting a firmer stance, any hopes for immediate rate cuts have likely faded. By removing language about pausing rate hikes, the central bank indicates that further tightening is possible if inflation data does not improve. This suggests that investors should prepare for higher short-term rates, especially on DI futures contracts for the first half of 2026. The central bank’s worry about unstable inflation expectations is well-founded. The recent August 2025 IPCA-15 inflation data showed an annual rate of 6.1%, considerably above the 3.5% target. Persistent inflation, alongside a surprisingly strong job market where unemployment fell to a multi-year low of 7.8% in July 2025, supports the bank’s decision to keep a restrictive policy. Consequently, the market will be highly sensitive to the next inflation report expected in early October.

Market Implications

This policy approach is likely to support the Brazilian Real, as the 15% Selic rate is one of the most attractive carry trades available globally, particularly when the U.S. Federal Reserve rate remains at 5.25%. This situation signals a good opportunity to buy BRL call options against the U.S. dollar, as the significant interest rate gap offers a buffer against potential currency drops. On the flip side, a prolonged period of high interest rates may hinder the domestic stock market. The Ibovespa index has already hit a plateau in recent months, and this confirmation of a hawkish central bank will likely pressure corporate earnings and values. We consider purchasing put options on the Ibovespa index a wise strategy to protect against a potential market decline. Looking back, we recall the aggressive rate hikes that began in early 2021, which raised the Selic from a record low of 2% to its current level. This history indicates that the central bank is credible when it says it “will not hesitate to resume rate hikes” if necessary. This is a serious warning, and the market should now account for a higher chance of another rate hike than it did previously. Lastly, the bank pointed out uncertainty stemming from possible U.S. tariffs on Brazilian steel, with a decision expected in the coming month. This external risk, combined with uncertainties in domestic policies, suggests that market volatility could rise. Buying volatility through options strategies like straddles on the BRL/USD pair or on the Ibovespa might be an effective way to navigate the upcoming period of uncertainty. Create your live VT Markets account and start trading now.

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