Lara Resende's rate-cap proposal triggers unprecedented rift between government and markets.

A proposal by economist André Lara Resende to cap the Selic rate dominated the weekend in Brazil, igniting an unusual tension between the political world and financial markets just after Luiz Inácio Lula da Silva's re-election to an unprecedented fourth term — and laying bare the fragility of the moment as the country enters a new governing cycle.

Lara Resende's paper, titled "I Accuse: A Proposal to Eliminate Brazil's Absurd Interest Rates," has been circulating for weeks, but took on explosive political dimensions when Folha de S.Paulo revealed that members of the government wanted to present it to Lula. The proposal calls for gradually reducing the Selic to a range between the inflation target and the economy's potential nominal growth — which today would mean bringing it down from 13.75% per year to something close to 7.5% over a twelve-month horizon, with possible use of international reserves, exceeding US$350 billion, to contain currency depreciation. Markets reacted with immediate apprehension. On Sunday, former PT president Gleisi Hoffmann amplified the debate by publicly praising the article on social media, calling it "fundamental to confront this terrorist offensive on Brazilian fiscal policy" — language that, the day after an election that had already plunged Brazilian assets into their worst week since 2020, helped deepen investor nervousness.

Finance Minister Dario Durigan tried to contain the damage. In statements to Valor Econômico and Folha, he denied that any meeting was scheduled between Lula and Lara Resende, said that interest rate caps or the use of international reserves were not under consideration, and reiterated that the government was not weighing a ceiling on the Selic. But the rhetorical pushback came late and only partially: the mere fact that government members were studying presenting the proposal to the president was enough to install structural doubt about the monetary policy framework Brazil took years to build.

The context amplifies everything. The Ibovespa ended the post-election week down 17.5% — its worst weekly performance since 2020 — and October registered a 9.21% decline, with the index retreating from historical peaks near the 200,000-point mark reached earlier in the month. The dollar posted its biggest weekly gain since 2008. The investment fund industry lost R$157.5 billion in assets between the day after the election and the following Wednesday, with equity funds accumulating double-digit losses, according to Economática data. In this environment, investors rushed to protective assets: the Avenue platform recorded its highest volume of account openings in 2026 on October 26, with registrations over the next two days running 60% above the annual average and net inflows three to four times higher than recent averages.

Itaú Unibanco's revised projections, released on Friday, capture the degree of deterioration in expectations. The bank cut its 2027 GDP growth forecast from 1.2% to just 0.5% and raised its inflation projection from 4.6% to 6.1% — well above the target ceiling. The bank's economists, led by former Central Bank director Diogo Guillen, now expect the Copom to halt the easing cycle at next week's meeting and hold the Selic at 13.75% through the end of 2027. The deterioration, according to the report, reflects a more depreciated exchange rate, the effects of the tax reform, the end of the 6x1 work schedule, and the reversal of fuel price mitigation measures — with the average dollar projected at R$5.60.

The tax reform, in turn, adds its own layer of complexity. The CBS rate set at 11.3% will raise the federal tax burden on consumption in 2027 relative to recent years, according to Folha calculations based on TCU data. The rate will be debated in Senate hearings starting November 11, under the stewardship of rapporteur Renan Calheiros. In parallel, the ICMS on fuels approved by Confaz will raise the price of diesel from R$1.17 to R$1.30 per liter starting in February — an 11.1% increase that has already triggered a public clash between Minister Guilherme Boulos and São Paulo Governor Tarcísio de Freitas, a sign of the political fragmentation Lula will have to manage in his fourth term.

In commodities, Brent crude ended October up more than 14% for the month, at its highest level since May, driven by the risk of escalation in the Iran conflict following the US midterm elections. Petrobras, whose common and preferred shares are part of the Ibovespa, responded by raising the price of jet fuel (QAV) by 7.2% for November — the second consecutive adjustment after an 11.76% increase in October. The state-owned company maintained a 98% utilization factor at its refineries in October, aiming to reduce imports, according to its Industrial Processes director, William França. The direct impact has already reached civil aviation: Abear revised its projection for growth in domestic flights in November versus the same month in 2025 from 9.4% down to 4.2%.

In the energy sector, Spanish companies dominated the transmission auction held by the government, winning seven of the eight projects on offer — a result that, according to Valor Econômico analysis, renews high discounts and demonstrates that foreign interest in Brazilian regulated infrastructure is holding up against short-term political turbulence. In the nuclear sector, at least five foreign and domestic groups are maneuvering for position in uranium exploration in Brazil, while the government drafts rules to allow private partnerships with Indústrias Nucleares do Brasil (INB). In poultry, the third confirmed outbreak of Newcastle disease in Santa Catarina — at a farm supplying BRF, owner of the Sadia and Perdigão brands, just 50 kilometers from the Paraná border — intensifies the health alert. Mexico has already restricted poultry imports from the Santa Catarina state, but Itaú BBA analysts warn that spread to Paraná or Rio Grande do Sul — which together account for the bulk of national poultry production — could dramatically broaden trade restrictions on a sector that generated R$140 billion in 2025.

The week ahead will be decisive. The Copom meets and markets broadly expect the easing cycle to be interrupted. The economic team has yet to define which fiscal package it will present to Lula, amid the president's resistance to measures that recall — as a Folha report reveals — the trauma of Dilma Rousseff's second term. Itaú Unibanco awaits the Copom meeting, the US payroll report, and the results of the US midterm elections. Investors will be watching closely to see whether Durigan can advance structural spending-control measures capable of restoring fiscal credibility — or whether the start of Lula's fourth term opens under the same pattern of frustration the market has known since December 2024.

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