Cheaper imports and a stronger Brazilian Real helped reduce goods inflation in 2025. Because of this, the central bank (BCB) signaled it could start cutting rates from March. But goods disinflation could slow if the BRL stops strengthening and if exporters like China have less room to cut prices further.
Services inflation has stayed near 5–6% and represents 37% of the IPCA basket. Even if goods inflation drops to 0% year on year from 1.7% at the start of 2026, core inflation could still stay above 3.5% unless services inflation also falls.
Headline inflation is expected to remain above 4%, even if petrol prices decline and food inflation stays subdued. In past cycles, sharp falls in goods inflation helped bring down high inflation, but often did not keep inflation at target.
With policy still tight, the BCB has room to begin cutting rates in March. Markets are pricing in more than 250bps of cuts for 2026, but the pace could be slower unless services inflation cools more clearly.
There is a growing gap between the market’s expectation of aggressive rate cuts and Brazil’s inflation reality. While the central bank may start easing in March, sticky services inflation is a key obstacle. This persistence suggests rate cuts may be much smaller than what current pricing implies.
The latest IPCA-15 data confirms services inflation is still high, around 5.8%, supported by a tight labor market. Unemployment recently fell to 7.5%, the lowest since late 2015. That keeps wage growth firm and pushes up service costs, making it harder for the central bank to justify fast, deep rate cuts.
For derivatives traders, this creates potential opportunities in the interest rate swap market. Paying fixed on DI futures swaps could perform well if the central bank delivers fewer cuts than the market’s dovish view of more than 250bp this year. In other words, it is a bet that the forward curve is pricing too many cuts, too quickly.
This view also matters for the Brazilian Real. If the easing cycle is less aggressive than expected, Brazil’s interest-rate advantage would likely remain attractive and could support the BRL. Options strategies that benefit from a stable or stronger Real versus the US Dollar may therefore make sense.
Brazil has seen a similar pattern before, after the 2015–2016 downturn. Goods inflation fell early and provided temporary relief. But service-sector pressures later returned and forced the central bank to stay tighter than markets hoped. The lesson is that an early win on inflation does not mean the fight is finished.
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