Central Bank Passes Buck to Lula on Interest Rate Future

The Monetary Policy Committee's decision to halt the Selic cutting cycle — a unanimous vote that kept the benchmark rate at 13.75% per year — was not, in itself, the surprise of this Wednesday; the market had already priced it in. What makes this day singular is what the decision reveals about the new geometry of economic power in Brazil: the central bank, by ending five consecutive 25-basis-point cuts, has explicitly handed over to the Lula administration responsibility for the next chapter of monetary policy. As financial market analysts summed it up, the future of the Selic depends less on the BC and more on the fiscal choices made by Palácio do Planalto at the outset of the fourth presidential term.

The Copom statement was read with surgical attention by fund managers and economists. The external environment is now described as "more adverse," headline and core inflation have accelerated, and the projection for the relevant horizon — now the second quarter of 2028 — rose from 3.2% to 3.5%, moving further away from the 3% target. Even more revealing was what the BC removed from the text: the reference to the magnitude of the calibration cycle, a signal the market interpreted as an indication that further cuts are not imminent. For Roberto Padovani, chief economist at BV, the BC acknowledged the more challenging scenario without offering any clue about its next steps. For Fernando Honorato at Bradesco, the statement contains "a certain implicit plea for help to the government" — a phrase that captures with precision the political-economic dilemma of the moment.

The government needs to help, but has not yet offered any. The National Treasury projects that, without primary surpluses, gross debt could reach 91.5% of GDP by 2036. The central bank has already recorded that this indicator hit 82.9% of GDP in September 2026, 4.3 percentage points above the start of the year, with estimates that a primary adjustment of at least 3 percentage points of GDP would be needed to stabilize it. President Lula, who is preparing a televised address to the nation to reiterate his commitment to fiscal responsibility — while, according to Valor Econômico, simultaneously expressing concern about lowering interest rates to stimulate investment — has yet to announce his economic team. Rafael Fonteles, the re-elected governor of Piauí and a name floated for the Finance Ministry, faces resistance within his own PT, having been subjected to what insiders describe as a smear campaign by allies. The most strategic post in the government remains vacant, and the market is demanding clarity.

In this environment of fiscal uncertainty and paralyzed monetary policy, the asset reaction was ambiguous. The Ibovespa closed up 1.20% at 167,525 points, breaking a six-session losing streak, pulled higher by an external factor: Donald Trump's defeat in the US midterm elections, with Democrats winning majorities in both chambers of Congress. The result reduced global risk perception and contributed to the decline of the dollar, which fell 0.65% to close at R$5.450. Brent crude plunged more than 9% on the news — the prospect of a more fragmented US government reduces bets on aggressive energy deregulation — dragging Petrobras shares down roughly 6%. The day's currency relief contrasts with a still-tense structural backdrop: the post-election dollar rally is already beginning to transmit into agricultural commodity prices such as sugar, wheat and coffee, pressuring consumer prices at a moment when inflation expectations are visibly unanchored.

Economist André Lara Resende's proposal to impose administrative limits on the Selic, which went viral in recent days and triggered panic in part of the market, remains at the center of the intellectual debate — but Monica de Bolle, senior fellow at the Peterson Institute for International Economics, warned that both Faria Lima and the government are making selective readings of the text. Milton Maluhy, CEO of Itaú Unibanco, was more direct: "it's no use cutting rates by brute force." The bank reported profit of R$12.6 billion in the third quarter, with return on equity of 23.6%, and Citi analysts said Itaú had proven itself stronger than the economic cycle.

Tax reform, moving in parallel with the macro turbulence, is accumulating its own tensions. The 11.3% reference rate for the CBS calculated by the TCU was contested by the CNI, which is pressing the Senate for a revision — where discussions are underway for a rate between 9.5% and 10%. The government issued a provisional measure setting the Selective Tax rates for 2027, notably 66.7% on cigarettes and up to 24% on alcoholic beverages. More than 20 industry associations are calling for the effective implementation of the CBS to be postponed to 2028. CNI and CNC filed appeals with the STF to delay the new work schedules resulting from the end of the 6x1 shift. And labor market data brought another shadow: Caged registered only 121,300 formal jobs created in September, a 43% year-on-year drop and the worst result for the month since the series began in 2020.

In the arena of geopolitical disputes over strategic resources, the US-China rivalry is driving a cycle of mining investment in Brazil — a trend that takes concrete shape with the agreement between Australia's Viridis Mining and Minerals and Belgium's Solvay for the offtake of the Colossus rare-earths project in Poços de Caldas, a crucial step to secure financing for the operation. Embraer, whose ADRs and shares traded on the NYSE and B3 reflect its growing internationalization, is advancing a historic push in India: the company is in talks with IndiGo — India's largest airline — for an order that could reach 100 aircraft with options for another 50, which would be one of the largest contracts ever closed by the Brazilian manufacturer.

In the coming days, the market will be watching Lula's address to the nation and, above all, the announcement of the economic team — the only signal capable of redirecting the trajectory of long-term rates and restoring investor confidence. The Copom statement made clear that the ball is in Planalto's court. The question is when, and whether, the government will kick it.