Lower Cpi Growth Pave Way For Rate Cuts

LOWER CPI & GROWTH PAVE WAY FOR RATE CUTS João Pedro Fachetti / Elizabeth Johnson

◼ The downside inflation surprise paves the way for at least two more 25bps rate cuts, should current trends persist ◼ Despite the improved near-term picture, durable disinflation remains a 2027 story ◼ Growth should lose momentum in H2 as high rates increasingly feed through to domestic demand ◼ Additional fiscal stimulus ahead of the October election appears less likely as Lula consolidates his lead The downside inflation surprise paves the way for another two rate cuts. Consumer prices rose only 0.06% mom in the first half of July, below market expectations, bringing 12-month inflation down from 4.80% to 4.52%. While this is positive news, it is not likely to last: we forecast that headline inflation will rebound to 5% by yearend, before easing to 4.08% in 2027. Although the CPI remains outside the target range, we expect Banco Central to cut rates by 25bps on 5 August, with another 25bps move increasingly likely on 16 September.

Chart 1: Inflation should rebound later this year before easing in 2027 % yoy

Headline Regulated prices Industrial goods Food Service Target 8

-2 Jan-26 Feb-26 Mar-26 Apr-26 May-26 Jun-26 Jul-26 Aug-26 Sep-26 Oct-26 Nov-26 Dec-26 Jan-27 Feb-27 Mar-27 Apr-27 May-27 Jun-27 Jul-27 Aug-27 Sep-27 Oct-27 Nov-27 Dec-27

The mid-month inflation print for July confirms a broader improvement in near-term inflation momentum. It follows June’s downside surprise and was accompanied by a sharp decline in diffusion, which means that price pressures became less widespread at the start of Q3. Broader underlying inflation indicators softened, too; and market inflation expectations for 2026 have now fallen for four consecutive weeks. This more benign inflation backdrop supports a less hawkish stance in August and September, but additional easing in Q4 will hinge on the effects of El Niño, fiscal policy and election-related measures.

Chart 2: Rate cuts would leave monetary policy firmly in restrictive territory %

Selic rate CPI (IPCA) inflation Ex-post real rate Ex-ante real rate 15 Neutral level estimated by BC

0 Dec-22 Dec-23 Dec-24 Dec-25 Dec-26 Sources: BCB, IBGE, TSLombard.

Despite the improved near-term picture, durable disinflation remains primarily a 2027 story. Food prices were down by 1.14% in July, as favourable seasonality, improved supply and the unwinding of earlier increases in fresh produce all provided significant relief to headline inflation. Lower diesel prices and weaker Chinese demand for Brazilian beef further helped contain food inflation. However, this relief is likely to be short-lived, as we expect El Niño to bring hotter and more extreme weather in Q4, raising the risk of renewed pressure on produce and the 2026/27 harvest.

Chart 3: Brazil is expected to keep soy acreage flat this harvest season

Soybean production ('000 tonnes) LHS Planted area for soybeans ('000 hectares) RHS 200,000 60,000 180,000 160,000 50,000 140,000 40,000 120,000 100,000 30,000 80,000 60,000 20,000 40,000 10,000 20,000 0 0

Electricity will remain a source of pressure on regulated prices. Residential electricity prices, for example, rose 3.03% in July, delivering the largest individual upward contribution to the index. This reflected the so-called “yellow” tariff surcharge, which is imposed to offset higher power generation costs. Drier conditions could require even larger surcharges later this year as hydroelectric capacity is taken offline. And this means that higher electricity will partly offset the recent decline in food prices and remain an upside risk to inflation through H2.

Services inflation has improved at the margin, but labour intensive components remain sticky. Broader services measures have softened, but categories most exposed to wage dynamics have remained stickier. Unemployment remained near historical lows at 5.4% in the three months to