September 15, 2025

Macro Research
Copom Warm-up
Copom Warm-up
Forward guidance once again, despite the risks having
Perseverance
increased

Caio Megale Rodolfo Margato Alexandre Maluf

Chief-Economist Economist Economist

Highlights
- For the second consecutive Copom meeting, the economic data and news flow throughout the intermeeting
period were mostly benign for the inflation outlook. The US Fed will likely resume its easing cycle this week; the
BRL has strengthened a bit further; domestic activity has shown additional signs of cooling; and inflation
expectations have fallen, although remaining above the 3% target;

- We estimate a further decline in Copom’s inflation projections: from 4.9% to 4.8% for YE 2025; from 3.6% to
3.5% for YE 2026; and from 3.4% to 3.3% for 27Q1, the current relevant horizon for monetary policy;

- As widely expected, we believe the Copom will keep the Selic rate at 15.00% on Wednesday. The post-decision
statement should reinforce the message that the policy rate will remain at current levels for a “very prolonged
period”. Perseverance should be the statement’s watchword;

- We anticipate a monetary easing cycle starting in January, with the Selic rate reaching 12.00% by the end of
2026. For the benchmark rate to approach its neutral level – around 5.50% in real terms, in our view – greater
progress will be needed both in rebalancing the output gap and (mainly) in improving prospects for fiscal reforms
from 2027 onwards.

Hawk-dove heatmap: Improving, though still far from enough

For the second consecutive Copom meeting, the economic data and news flow coming in throughout the
intermeeting period were mostly benign for the inflation outlook.

The BRL has strengthened a bit further, reaching a 15% gain year-to-date. Most of this appreciation has already
been passed through to IPCA inflation, but we still see positive effects until the end of the year. Indeed, PPI
inflation (measured by FGV’s IPA) remains subdued, though no longer in deflationary territory.

The US Federal Reserve will likely resume its easing cycle this week, providing further support for the Brazilian
currency.

Economic activity has been cooling, although gradually and unevenly across sectors. 25Q2 GDP figures
revealed that domestic demand lost steam, in line with expectations. High-frequency activity indicators for
July, such as industrial production and retail sales, suggested further deceleration in Q3. Soft data, such as
business and consumer confidence, is another piece of evidence in that direction.

Recent inflation data have been mixed. On the one hand, the latest IPCA results reinforced that inflation has
cooled since the first semester. On the other hand, services inflation remains sticky, which should keep overall
inflation considerably above the 3.0% target. Inflation expectations fall moderately, contrasting with the upward
trend observed until May.
Having said that, the Copom’s task to rebalance the economy and reduce inflationary pressures appears far
from complete.

Unemployment rate remains close to all-time lows. Formal job creation has slowed in recent months, but it
remains unclear whether this dynamic reflects only lower demand or also labor supply constraints. Accordingly,
real wages have been growing steadily. Moreover, our estimates still point to a positive output gap (GDP above
its potential) throughout the entire relevant horizon for monetary policy, particularly considering the
government’s growth supportive measures expected for 2026 - see details in our latest Brazil Macro Monthly
report.

Debt sustainability risk remains elevated. The federal government presented the 2026 budget bill. Pressures
on mandatory spending continue, forcing the search for new sources of revenue, many of them non-recurring
(see details here). This reinforced the view that structural reforms are necessary for the next presidential term,
starting in 2027.

Overall, we believe that recent economic data and news should give Copom confidence that the most acute
inflationary pressures have been tamed, but there is still a long way before it is clear that inflation will converge
to the 3% target.

Hawk-Dove Heatmap*
Variables Nov-24 Dec-24 Jan-25 Mar-25 May-25 Jun-25 Jul-25 Sep-25 Comment

Exchange rate (BRL/USD)** 5.73 5.95 6.00 5.80 5.71 5.55 5.56 5.42 Further appreciation

Ex-ante real interest rate (%) 8.5 9.2 9.4 9.1 9.1 9.6 9.7 9.5 Significantly restrictive

GDP 2025 Fcst (%, Focus Survey) 1.93 2.00 2.06 1.99 2.00 2.20 2.23 2.16 Cooling gradually

GDP 2026 Fcst (%, Focus Survey) 2.00 2.00 1.72 1.60 1.70 1.83 1.89 1.80 Cooling gradually

Output gap 1.1 1.3 1.3 1.2 1.2 1.1 1.0 0.9 GDP level above potential

Capacity Utilization - Manufacturing (%, s.a.) 82.6 81.6 81.1 80.9 83.0 83.7 83.9 82.6 Receded, but remains at high level

Unemployment rate (%, monthly, s.a., PNAD) 6.6 6.2 6.5 6.4 6.6 6.4 5.8 5.6 Close to all time lows

IPCA 12m (%) 4.4 4.8 4.8 5.1 5.5 5.3 5.4 5.1 Still quite above the target, despite recent improvement

Core IPCA annualized 3MMA 4.8 4.5 5.5 5.6 6.1 5.4 5.2 4.5 Still quite above the target, despite recent improvement

IPA-10 12m (%) 5.20 7.31 7.47 9.91 10.01 5.77 2.71 1.92 Subdued PPI is goods news for IPCA ahead

IPCA 2025 Fcst (Focus Survey, %) 4.03 4.59 5.50 5.66 5.53 5.25 5.09 4.83 Falling, but still above the target range

IPCA 2026 Fcst (Focus Survey, %) 3.61 4.00 4.22 4.48 4.51 4.50 4.44 4.30 Falling gradually, from high levels

CDS 5y 157.7 167.4 180.8 178.1 182.1 152.2 148.3 132.5 Keeps falling

Treasury 10y (%) 4.4 4.2 4.6 4.3 4.3 4.4 4.4 4.1 The Fed should cut rates in September

Freight prices (WCIDCOMP Index) 3213 3533 3445 2368 2091 3543 2602 2044 Additional decline

Brent US$ 74.1 71.1 78.2 70.6 64.9 70.2 68.4 67.1 Sustained close to $70 per barrel

CRB CMDT Index 534.0 537.6 540.5 541.0 548.9 560.0 571.3 552.1 Edged down slightly

Reservoirs levels (%) 40.30 43.00 59.8 67.8 70.1 67.8 68.8 54.3 Still ok, but deserves atention going forward

*The shades definition takes into account the historical evolution of the indicator and a judgment component of the XP Macro team.

** Exchange rate from the reference scenario (average exchange rate observed over the ten working days ending on the last day of the week prior to the Copom meeting)
Central Bank’s model: Further decline in inflation projections
At the last Copom meeting, held in July, inflation projections in the reference scenario were 4.9% for YE 2025,
3.6% for YE 2026, and 3.4% for 27Q1, the current relevant horizon for monetary policy.

Since then, the main variables included in the Central Bank’s inflation model have contributed to the downside.
According to the Focus Survey, median inflation expectations dropped from 5.09% to 4.83% for YE 2025, and
from 4.44% to 4.30% for YE 2026. Furthermore, current inflation came in below the monetary authority’s
projections, with emphasis on the relief in the industrialized goods and foodstuff groups. The exchange rate
appreciated a little further, from 5.55 to 5.42 reais per dollar (average to be used by Copom at this meeting).

Meanwhile, international commodity prices rose moderately between Copom meetings, particularly
agricultural goods. Market expectations for the Selic rate remained unchanged for 2025. The median projection
for 2026 edged down slightly from 12.50% to 12.38%. Finally, we expect no change in output gap estimates.

Copom’s inflation projections have eased slightly. We believe that its forecast for 2025 IPCA inflation will fall
from 4.9% to 4.8%, as the exchange rate appreciation, coupled with the decline in current inflation, should more
than offset a higher estimate for the group of administered prices – we assume an increase from 4.4% to 4.7%.
Copom’s projection for 2026 IPCA should decrease from 3.6% to 3.5%, mainly due to the downward impact
from inflation expectations – see table below. Similarly, we expect a reduction from 3.4% to 3.3% for 27Q1, the
current relevant horizon for monetary policy.

Brazilian Central Bank: Reference Scenario

2025 2026 1T27
Previous This Impact on Previous This Impact on Monetary Impact on
This Copom
Copom Copom total IPCA Copom Copom total IPCA Policy Report total IPCA
Market-set prices (I) 5.1 4.8 -0.2 3.5 3.3 -0.2 3.3 3.1 -0.2
Exchange rate 5.55 5.42 -0.1 - - -0.1 - - -0.1
Commodity index ** 396.2 398.3 0.0 - - 0.0 - - 0.0
Benchmark Selic rate (end of period) * 15.00 15.00 0.0 12.50 12.38 0.0 12.00 11.50 0.0
Inflation expectations * 5.09 4.83 0.0 4.44 4.30 -0.1 4.27 4.17 -0.1
Inertia/Current inflation - - -0.1 - - 0.0 - - 0.0
Output gap - - 0.0 - - 0.0 - - 0.0
Administered prices (II) 4.4 4.7 0.1 4.0 4.3 0.1 3.9 4.0 0.0
IPCA (I + II) 4.9 4.8 -0.1 3.6 3.5 -0.1 3.4 3.3 -0.1
* Focus survey - reference period: September 12, 2025
** considering the weights of the CRB index components for Brazilian inflation

Monetary policy decision and communication: No further hikes, but too early to
consider cutting
We believe the Copom will keep the Selic at 15.00% this week, as widely expected. The post-decision statement
should reinforce the message that the policy rate will remain at current levels for a “very prolonged time”.

Inflation outlook has improved somewhat, which should encourage the Copom to drop the possibility of further
hikes. In July, the Committee emphasized that it would “not hesitate to resume the rate hiking cycle if
appropriate”. Since then, i) economic activity has slowed more clearly; ii) inflation expectations have fallen for
the short and medium term; iii) the Fed will probably resume its easing cycle. Thus, the post-decision statement
will probably recognize, very carefully, those improvements. Thus, we believe the Copom will adjust the wording
to state that it no longer foresees the need to resume the monetary tightening cycle going forward.

At the same time, we expect the Copom to emphasize that it is not considering cutting rates anytime soon.
Inflation dynamics have improved, but it remains considerably above the target. Domestic demand has been
losing steam but should receive a fresh impulse as the growth-supportive measures announced for 2026 get
effect. Thus, the post-decision statement will probably reinforce that the policy rate will remain at current levels
for a “very prolonged time”. Perseverance should be the watchword in the communique.
A possible wording for the statement would be:

Our View: We see rate cuts in early 2026. The size of the easing cycle will depend on
fiscal reforms
The balance of risks for inflation has improved recently, but it seems too early to discuss rate cuts. Inflation
expectations are still significantly above the target. BCB officials continue to emphasize, in their public
speeches, that the Selic rate should remain unchanged Medium-term inflation expectations have eased slightly, but
remain well above the target
for a “very prolonged time”. IPCA forecast (Focus survey) 1Y / 1Y forward (% of the target)
50

If the recent improvement in inflation outlook 40

consolidates over the coming months, the Copom 30

should eventually have some room for a less tight 20

monetary policy. Our baseline scenario considers that 10

will happen early next year. 0

-10

A gradual easing cycle in 2026. Thus, we anticipate a -20

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monetary easing cycle starting in January, with the Selic

rate reaching 12.00% after six consecutive 50-bp cuts. Source: BCB, XP
The policy rate would stabilize at around 7.5% in real terms, above what we consider neutral, due to fiscal
challenges for the next presidential mandate.

Fiscal reforms are needed for monetary policy to return to neutral. For the Selic rate to get closer to its neutral
level – around 5.50% in real terms, as per our estimates – fiscal reforms that reduce the pace of expenditure
growth are key. Without reforms, rising government debt may revive the debate over fiscal dominance that
took place in 2024 Q4.

XP Macro

Contact: economiaxp@[Link]
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