Skip to content

Brazil’s Neutral Interest Rate Debate: Economist Kanczuk Challenges Central Bank’s 5% Figure, Citing 8% as More Realistic

Expert Disagrees with Central Bank on Brazil’s Neutral Interest Rate

A prominent economist, Kanczuk, has publicly challenged the Brazilian Central Bank’s (BC) assessment of the country’s neutral interest rate. While the BC suggests a neutral rate of 5%, Kanczuk believes a more accurate figure would be around 8%. This difference in perspective has significant implications for monetary policy and the economic outlook.

Kanczuk’s analysis, presented by ASA, forecasts an initial 0.25 percentage point cut in interest rates in January, followed by a more aggressive 0.50 percentage point reduction in March. The projection anticipates the Selic rate, Brazil’s benchmark interest rate, concluding 2026 at 11.50%.

“We believe the most probable scenario is in January. We see it as a calmer scenario, with the dollar below R$ 5.40 and the Central Bank cutting rates,” Kanczuk stated. This outlook is contingent on a stable economic environment and a supportive monetary policy stance.

Fiscal Deterioration and Inflationary Risks Loom

A significant concern highlighted by Kanczuk lies in the second half of 2026. With inflation hovering near 4% and ongoing interest rate cuts, Brazil is projected to approach its presidential elections with a stimulative economic policy. This scenario raises questions about the sustainability of economic growth and inflation control.

Kanczuk emphasized the asymmetry of inflationary risks. He pointed out that there is a substantially higher probability of inflation surprising to the upside, exceeding 4.5%, than falling below 1.5%, which represent the tolerance bands for the inflation target.

“It’s not that interest rates will fall [to expansionary levels], the Selic will be at 13.5% by mid-year. But when we look at future interest rates and expected inflation, the real interest rate will already be close to 8%. We will reach the election with a stimulative policy,” he concluded. This suggests that despite nominal rate cuts, the real cost of borrowing could remain elevated, yet the overall economic environment might be perceived as expansionary.

Implications for Economic Policy and Elections

The divergence between Kanczuk’s assessment and the Central Bank’s stance underscores the complexities of setting monetary policy in Brazil. The neutral interest rate is a theoretical concept representing the rate at which monetary policy is neither expansionary nor contractionary. A higher neutral rate suggests that current policy might be too loose or that underlying economic conditions require higher rates to maintain price stability.

The potential for a stimulative economic policy during an election year is a recurring theme in Brazilian politics. Economists often caution against such scenarios, as they can lead to overheating and subsequent inflationary pressures, requiring more drastic measures later on. Kanczuk’s warning about the risk of inflation surprising to the upside is a critical point for policymakers and investors alike.

The debate over the neutral interest rate, coupled with concerns about fiscal health and inflation, sets the stage for a closely watched period in Brazil’s economic and political landscape. The decisions made by the Central Bank and the government in the coming months will be crucial in navigating these challenges and ensuring long-term economic stability.