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High rates, high stakes
19/12/2025
Brazil’s central bank looks set to remain hawkish. Structural reforms following next year’s elections could help unlock the country’s potential.
Brazil has long been called the ‘country of the future’, but the future seems to remain elusive. Policy priorities from 2014, when Dilma Rousseff narrowly won re-election, remain eerily relevant.1 Despite political swings – right in 2018, left in 2022 – structural reforms to boost long-term growth have largely stalled, no matter who was in power. As the 2026 presidential elections loom, however, there might be a better chance than usual of tackling impediments to longer-term growth.
Our Chart of the Week highlights some of the strengths as well as the costs of the current institutional set-up. The benchmark interest rate, known as Selic in Brazil, has remained well above headline and core inflation since 2022. From an investor’s perspective, this shows a fiercely independent central bank seemingly determined to anchor expectations and contain inflation, especially in services. Still, persistently high rates prompt questions about underlying structural weaknesses in Brazil’s legal and fiscal architecture.
Mandatory spending indexation, numerous tax exemptions and subsidized credit have historically dulled monetary transmission. This frequently requires the central bank’s monetary policy committee Copom to keep policy tighter for longer than in other countries. Meanwhile, politically well-connected incumbents are often sheltered from the effects. This can create hidden costs and delays, compounded by high taxes, bureaucracy, and slow contract enforcement. Protecting incumbents may stifle innovation, business creation and competition. However, there appears to be a growing readiness for change across the political spectrum.2 Encouraging signs include efforts to boost the efficiency of government agencies at various levels, as well as the new minimum-wage rule’s cap and attempts to rein in earmarked credit, though policy implementation is likely to remain key.
The elections in the coming year are likely to introduce volatility, election-year gimmicks, and policy uncertainty. However, they also represent a rare opportunity for a new mandate. Investors may watch for credible commitments regarding spending discipline, fiscal reforms, and plans for judicial reform that could reduce litigation costs and speed up contract enforcement. Recent data offer reasons for cautious optimism. Headline inflation has cooled back within the target’s upper band, and inflation expectations are gradually improving. Nevertheless, Copom kept the Selic rate at 15.00% in December and maintained a fairly hawkish stance.
“Until now, Brazil’s central bank has demonstrated its unwavering commitment to bring inflation back to target, despite government pressure and Governor Galípolo’s proximity to President Lula.”, argues Yi Li-Hantzsche, emerging markets research analyst at DWS. “And with a constructive election outcome and the prospect of credible reforms, Brazil could finally unlock lower rates without putting credibility at risk.”
Brazil’s central bank hawkish stance partly reflects underlying structural weaknesses
Sources: Haver Analytics, DWS Investment GmbH as of December 2025
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