Brazil's rate setters, led by Gabriel Galípolo, lowered their 2026 growth call to 1.8% from 2% in June. The central bank's own survey shows private forecasters at 1.88% for 2026. Looking to 2027, officials project a softer 1.4% expansion as high borrowing costs, global uncertainty, and less push from government spending and credit weigh on activity.
They described a second quarter slowdown that is likely to carry into the third, fitting a broader downshift in momentum that began in late 2024 when tightening started. Early third quarter readings also point to cooling.
A week before publishing the report, the bank shaved the benchmark Selic to 13.75% with a quarter point move, marking five consecutive cuts and total reductions of 125 basis points since March. Policymakers said the eventual size of this easing cycle will be steered by the data, keeping a careful tone as Brazil heads into the first round of the presidential election on Oct. 4.
Galípolo said evidence is building that the slowdown is more durable and that the deceleration so far lines up with what the board anticipated. He also warned against reading too much into one-off figures, saying the central bank "doesn't get carried away." He added that officials must assess risks beyond their base case and remain vigilant with policy still restrictive. Economic Policy Director Paulo Picchetti stressed how murky the outlook is, saying the institution currently lacks strong confidence in its model, while adding they still don't expect a major recession in 2027.
A weekly survey published by the central bank points to the Selic at 13.5% by December, with 2027 and 2028 held at 12% and 10.50%. Forecast references include Bloomberg Economics dated Aug 28 and consensus snapshots from Sep 21, with a separate 4Q 2026 consensus from the Sep 18 Focus survey.
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Officials expect farming to add less to growth ahead given heightened El Niño risks, higher input costs, and elevated producer debt. Credit conditions are softening further, and leverage is still squeezing households and companies.
The labor market remains tight but is easing. As the report put it, "The labor market showed signs of cooling during the period, with average earnings declining and employment posting only a modest increase, while household indebtedness remained elevated."
The output gap is still positive for now but narrowing. It measures 0.5% in 2026's second quarter, dips to 0.4% in the third, and by the first quarter of 2028 it is -0.4%.
Investors are focused on how the leading contenders - Luiz Inácio Lula da Silva, the incumbent, and Flávio Bolsonaro - propose to curb the rise in public debt and spending. An AtlasIntel poll released Wednesday shows them effectively level at 47% in a hypothetical runoff.
Bottom line for your money: growth expectations are being marked down while rates are easing but still tight, and politics plus weather are real variables for 2026 and 2027. That combination can sway borrowing costs, job stability, and how resilient Brazilian demand looks in the year ahead.
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