We’re gonna need a bigger boat
The decline in inflation has been concentrated on exchange-rate-sensitive items, but further progress depends on a slowdown in economic activity, which is already underway, and on the labor market, which, in contrast, remains resilient. Consumption appears to respond more to restrictions in the credit market than to conditions in the labor market. However, it is precisely in the credit market where the government has greater capacity to intervene, as illustrated by the expansion of private payroll-deducted loans and the Minha Casa Minha Vida housing program. The most recent credit issuance data already point to an acceleration that could imply stronger consumption in early 2026. Although the Central Bank’s projections are approaching the midpoint of the target and open room for the beginning of rate cuts, the underlying picture—of a still positive output gap and unanchored expectations—calls for caution regarding the pace of monetary easing. The convergence of inflation toward the target continues to depend on further rounds of currency appreciation.
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