Despite tensions surrounding the war in the Middle East and the El Niño, Brazil’s Central Bank cut interest rates for the fifth consecutive time.

The Monetary Policy Committee unanimously reduced the Selic rate – Brazil’s benchmark interest rate – by 0.25 percentage points, to 13.75 percent per year.

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“The external environment remains uncertain due to the ongoing armed conflicts in the Middle East and uncertainty regarding monetary policy in some advanced economies. This scenario calls for caution on the part of emerging economies in an environment marked by increased volatility in asset and commodity prices,” the statement said.

Inflation

The Selic rate is the Central Bank’s main tool for keeping official inflation – as measured by the Broad National Consumer Price Index (IPCA) – under control. In August, the index stood at -0.32 percent, the lowest level in four years. On a 12-month rolling basis, the index fell to 4.22 percent, down from 4.44 percent in July.

In the latest Monetary Policy Report, released in late June by the Central Bank, the monetary authority raised its IPCA forecast for 2026 from 3.9 to 5.2 percent, but the estimate will be revised due to the recent drop in inflation.

Market forecasts are less pessimistic. According to the Focus market readout – a weekly survey of financial institutions released by the Central Bank – official inflation is expected to close the year at 4.9 percent, above the upper limit of the target range of 4.5 percent. Before the start of the war in the Middle East, market estimates stood at 3.95 percent.

Selic

The benchmark interest rate is used in government securities trading within the Special System for Settlement and Custody (Selic) and serves as a guide for other interest rates in the economy. By raising it, the Central Bank curbs excess demand that puts upward pressure on prices, because higher interest rates make credit more expensive and encourage saving.

By lowering the benchmark interest rate, the Monetary Policy Committee makes credit cheaper and encourages production and consumption, but weakens inflation control. To cut the Selic rate, the monetary authority must be certain that prices are under control and not at risk of rising.

*Luciano Nascimento contributed to this article.

Declines in electricity bills, food prices, and transportation costs caused August’s official inflation rate to close out the month at -0.32% – the lowest rate since August 2022, when the index reached -0.36%.

In July, Brazil’s consumer prince index IPCA, which is used to gauge the country’s official inflation, stood at 0.07 percent. In August 2025, it was -0.11 percent. The data were released Friday (Sep. 11) by the statistics bureau IBGE.

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August’s negative change brought the index’s 12-month cumulative total to 4.22 percent – the lowest figure since March 2026 (4.14%). In July, the cumulative total had stood at 4.44 percent.

Last month’s figure came in below market estimates. Last Tuesday’s (8) Focus market readout – a Central Bank survey of financial market participants – projected August inflation at -0.23 percent. For the end of 2026, the market expects inflation to be five percent.

The inflation target set by the National Monetary Council is three percent, with a tolerance of 1.5 percentage points (p.p.) above or below, meaning a range of 1.5 to 4.5 percent.

Since the beginning of 2025, the target assessment period has covered the immediately preceding 12 months, rather than just the figure reached at the end of the year (December). The target is considered missed if inflation exceeds the tolerance range for six consecutive months.

Drivers

Of the nine groups surveyed, four showed deflation in August.

• Food and beverages: -0.34% (impact of -0.07 p.p.);
• Housing: -1.87% (-0.29 p.p.);
• Household goods: 0.64% (0.02 p.p.);
• Clothing: 0.12% (0 p.p.);
• Transportation: -0.86% (-0.17 p.p.);
• Health and personal care: 0.23% (0.03 p.p.);
• Personal expenses: 1.30% (0.13 p.p.);
• Education: 0.47% (0.03 p.p.);
• Communication: -0.09% (0.00 p.p.).

Housing experienced its deepest deflation since the start of the Real Plan in 1994. The reason for this is the Itaipu Bonus – a discount consumers received on their monthly electricity bills, which fell by an average of 7.63 percent. The bonus consists of distributing the positive balance from the trading account of Itaipu, a state-owned hydroelectric plant, which is credited to electricity bills.

Of all the components of August’s IPCA, the electricity bill was the factor that most significantly pulled the index downward.

Food

The decline in food and beverage prices marked the third consecutive drop. In July, prices fell by 0.67 percent; in June, by 0.24 percent.

Food is the group with the greatest weight in the official inflation, accounting for 21.5 percent of Brazilians’ monthly consumption basket.

Index

The IPCA measures the cost of living for households with incomes between one and 40 minimum wages. In total, prices are collected for 377 sub-items, comprising products and services. The figures are calculated across ten metropolitan regions across Brazil.