Brazil's central bank has indicated that its benchmark interest rate may remain elevated for an extended period to combat persistent inflationary pressures and ensure a return to the target range.

The minutes from the bank's Monetary Policy Committee (Copom) meeting, released on June 23, highlighted concerns over a deteriorating inflation outlook and rising inflation expectations.

The committee noted that despite its unanimous decision last week to cut the Selic rate from 14.50% to 14.25%, the current inflation situation remains challenging. The latest inflation readings continue to exceed the upper limit of the official target range, while medium to long-term inflation expectations have moved further away from the target.

According to the central bank's updated projections, the inflation forecast for 2026 has been revised up to 5.2% from a previous estimate of 4.6% under the baseline scenario. The forecast for 2027 has also been increased to 3.7% from 3.5%. Brazil's current inflation target is set at 3%, with a tolerance band of plus or minus 1.5 percentage points.

The committee pointed out that since its April meeting, market expectations for inflation in the coming years have worsened, with a notable "de-anchoring" phenomenon observed for 2028 expectations. In this context, maintaining a relatively high interest rate level remains a crucial tool for containing inflation expectations and steering prices back towards the target.

The committee stated it will continue to formulate monetary policy with a "prudent and calm" approach, while closely monitoring developments in the Middle East conflict and its potential direct and indirect impacts on global energy markets, supply chains, and price levels.