1Q26_ Quarterly Outlook Report_Final_EN - Flipbook - Page 99
T H E P LUMB LI N E | A RETU RN TO F I RS T PRI N CI PL ES
Markets expect a slow start to the BCB’s rate cuts, with policy rates still high two years hence
16%
12%
8%
4%
0%
2021
2022
BCB target rate
2023
2024
2025
Market-implied pricing
2026
2027
Scotiabank forecast
Source: Bloomberg, Scotiabank Economics, Scotia Wealth Management.
Although economists and markets are broadly aligned in expectations for sizable easing over
2026, this does not imply that the magnitude of the BCB cuts is set in stone. Aside from how the
economy and markets (namely, the Brazilian real and Brazilian debt) may evolve in anticipation
of the October vote, the inflationary backdrop remains touchy. Inflation expectations have
certainly shifted in an encouraging direction for the BCB, with the headline price growth forecast
to decelerate from 4.5% at end-2025 (down from a forecast of 5.5% as at Q2/25) to 4.2% at
end-2026, before falling to 3.8% at end-2027. However, inflation slowing from 4.5% to 4.2% over
12 months is not a massive shift lower; the decline would still place it near the upper end of the
BCB’s 3% +/- 1.5% tolerance band.
The conditions for rate cuts may be in place, as it is now appropriate to move away from highly
restrictive levels. However, the BCB may encounter reasons to cut less – or more – and its
experience of having to return to hikes in 2024 may tilt the balance toward caution. For the BCB
to ease more than markets and economists anticipate, inflation expectations would likely need
to keep declining toward the midpoint of the tolerance band and/or that economic strains
deepen, pushing growth closer to the low 1s rather than the high 1s in 2026. In the case of the
former, the trajectory of inflation expectations is encouraging, but GDP forecasts have not
deteriorated enough in recent months to motivate more proactive BCB policy.
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