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.