Focus: Inflation Eases, But Declining GDP Raises Concerns
The Focus Report released by the Central Bank on Monday (31) presented a figure that, in isolation, seems positive: the median of the IPCA for 2026 fell from 5.02% to 5.01%. This marks the first weekly decline in the projection in several weeks. However, the number stubbornly remains above 5%, and what truly draws attention lies in another part of the survey.
The expectation for GDP in 2026 has dropped for the second consecutive week, from 1.95% to 1.92%. While inflation barely budges, economic growth is being eroded week after week. This combination raises alarms about a scenario of mild stagflation, something Brazil is well acquainted with from past episodes.
Stable Inflation at the Ceiling, Eroding Growth
To understand what is happening, it is worth looking at the numbers in perspective. The projected IPCA for 2026 at 5.01% is significantly above the inflation target ceiling, which is 4.50% considering the tolerance range of the continuous targets system adopted by the Central Bank. In other words, the market is already pricing in a whole year of non-compliance with the target.
The most concerning aspect is the following horizon. The projection for the IPCA for 2027 rose from 4.25% to 4.28%, marking the third consecutive weekly increase. This indicates that economic agents do not see inflation converging towards the center of the target (3%) even in the medium term. Estimates for 2028 and 2029 remained stable at 3.80% and 3.50%, both still above the target.
This persistent disconnection of expectations is precisely what the Central Bank is trying to combat with the restrictive monetary policy of recent quarters. The projected Selic rate for the end of 2026 remains at 13.75% per year, a level that keeps credit costs high and serves as an anchor against inflationary pressures.
Declining GDP: The Real Cost of High Interest Rates
Here lies the central dilemma. The same Selic rate that aims to contain inflation is exacting its price on growth. The GDP projection for 2026 at 1.92% represents a practically stagnant economy when accounting for population growth. For 2027, the median is even worse: 1.50%, unchanged in recent weeks.
The trajectory is revealing. At the beginning of the year, projections for GDP in 2026 were closer to 2.5%. The gradual erosion week by week reflects a growing perception that the accumulated effects of high interest rates, combined with fiscal uncertainties, are weighing on economic activity more than expected.
This Tuesday (1st), the market will receive the official data on Brazilian GDP, which should add more context to this picture. If the numbers come in below expectations, the pressure on the Central Bank to initiate a more aggressive interest rate cut cycle is likely to increase, as previously discussed in analyses regarding the impact of the Selic on investments.
Exchange Rate and Interest Rates: Apparent Stability, Real Tension
The dollar projected for the end of 2026 remained at R$ 5.20, while for 2027 the expectation is R$ 5.30. The stability in exchange rate projections may seem reassuring, but it conceals an important dynamic: the real can only sustain itself at this level precisely because interest rates are at restrictive levels. It is a fragile balance.
The expected trajectory for the Selic shows gradual cuts: 12% in 2027, 10.50% in 2028, and 10% in 2029. This slow pace of easing suggests that the market does not expect any abrupt changes in the Central Bank's stance. Gabriel Galípolo, at the helm of the institution, has reinforced the commitment to inflation convergence, even if it means sacrificing short-term growth.
For investors, the scenario brings direct implications. Post-fixed income assets remain attractive with the Selic at this level, while the Brazilian stock market continues to be pressured by high capital costs. The Ibovespa, even flirting with 178,000 points in the futures market, faces a macro environment that makes it difficult to sustain higher multiples for listed companies.
-- Price
What Focus Reveals About the Economic Cycle
This week's report confirms a trend that has been consolidating in recent months: Brazil is trapped in a situation where inflation does not ease quickly enough to allow for interest rate cuts, and high interest rates drain economic growth. It is a self-reinforcing cycle.
The fiscal issue remains as a backdrop. Unanchored inflation expectations reflect, in part, the market's distrust regarding the trajectory of public accounts. Without a clearer signal of fiscal discipline, the Central Bank is left alone in the fight against inflation, using interest rates as the only tool, which amplifies the cost in terms of growth.
For investors, the message from Focus is clear: do not expect a quick turnaround in the Brazilian macroeconomic scenario. The combination of stubborn inflation, weak growth, and high interest rates is expected to persist throughout 2026, as we have been following in the financial coverage of the portal. Those who are positioned need to calibrate return expectations for an environment of modest growth and high capital costs.
The GDP data released this Tuesday could be the next catalyst. If it confirms the slowdown that Focus anticipates, the narrative of mild stagflation gains strength. And with it, the political pressure for interest rate cuts, which would place the Central Bank in an even more delicate position.
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