Standard Chartered’s Dan Pan argues that while cheaper imported goods and a stronger Brazilian Real have sharply reduced goods inflation and allowed BCB to signal rate cuts from March, persistent services inflation near 5–6% is likely to keep core and headline inflation above target. The bank expects BCB to ease cautiously and potentially undershoot current market pricing for 2026.

Services inflation threatens disinflation progress

"Strong currency appreciation and lower input prices lowered Brazil’s goods inflation significantly in 2025, prompting BCB to signal that it will start an easing cycle in March. However, goods disinflation may soon run out of steam if the BRL FX rally stalls and if foreign exporters like China find diminishing room for price cuts."

"Meanwhile, services inflation – which accounts for 37% of the IPCA basket – has continued to stall between 5-6%. Our calculations show that even if goods inflation dips to 0% y/y (from 1.7% y/y at the beginning of 2026), core inflation may still struggle to break below 3.5% unless services inflation eases more notably."

"Headline inflation is likely to remain above 4% even with potential gasoline price cuts and subdued food inflation."

"Historically, periods of sharp goods disinflation have helped to bring down high inflation but have almost always failed to keep inflation at target."

"A tight monetary stance gives BCB room to take the partial win from slowing goods disinflation and start easing in March. But it may be reluctant to deliver the more than 250bps of rate cuts that are priced in for 2026 without greater confidence that services inflation will continue to come down."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)