Central Bank's cautious pause signals fiscal anxiety over rate cuts.

The Central Bank cut the Selic rate by 25 basis points on Wednesday, bringing it to 14% per year for the fourth consecutive time — and the market, rather than celebrating, pulled back. The Ibovespa was trading down 0.42% on Thursday morning, the dollar opened weaker at R$5.1255, but interest rate futures rose, signaling that the message that mattered was not in the cut itself, already widely priced in, but in the silence of the Copom statement regarding next steps. The Central Bank chose to preserve full flexibility, leaving open both a continuation of the cycle and a potential pause — and this ambiguity, in a charged fiscal and electoral context, is what dominates the Brazilian financial debate at this moment.

The decision consolidates one of the most cautious monetary easing cycles since the creation of the inflation-targeting regime in 1999. Economists consulted by Folha de S.Paulo assess that the Central Bank sought to avoid any early commitment given an unstable external backdrop and inflation expectations still unanchored for 2027 and 2028. Copom itself reiterated its IPCA projection of 3.2% for the first quarter of 2028, the relevant horizon for monetary policy, while acknowledging that it "closely monitors the additional de-anchoring of expectations." The market grasps the subtext: the window for further cuts exists, but is far from guaranteed, especially with Federal Reserve Chair Kevin Warsh signaling to the Financial Times a willingness to raise rates in September should US inflation accelerate — a move that would pressure emerging markets broadly.

On the domestic front, the fiscal picture remains the main structural obstacle. The BNDES's TLP surpassed 8% per year plus inflation for the first time in history, making long-term credit more expensive for companies at a moment when industry has already shown a sharper-than-expected contraction in June, closing the second quarter with two consecutive months of losses. The July services PMI revealed contraction after eight months of expansion, a sign that the activity slowdown, anticipated by the Central Bank itself, is materializing. Even so, vehicle sales jumped 15% in July year-over-year, according to Fenabrave, a contradiction that reflects an economy cooling unevenly — credit-sensitive sectors retreat while those still supported by the tight labor market hold firm.

Pressure on the Lula administration is mounting in equal measure. PT allies argue behind the scenes that the president should publicly commit to fiscal adjustment in the campaign for a potential fourth term, while public debt continues on an upward trajectory. Finance Minister Dario Durigan made the rounds of television studios this week in a defensive posture, reiterating that the government has zeroed out the primary deficit, that there is no budgetary loss of control, and that it rules out both capital controls and any change to the real adjustment rule for the minimum wage. "The market recognizes that the government has zeroed the deficit, despite criticism regarding exceptions to the fiscal framework," the minister told GloboNews, admitting mid-sentence the tension surrounding him. The situation is aggravated by data from CNC: 82% of Brazilian families were in debt in July, the sixth record in 12 months, in a series begun in 2010. Itaú CEO Milton Maluhy Filho went further by publicly suggesting that presidential candidates should clearly declare their view on the trajectory of public debt — a rare statement from a banker in an election year.

A fiscal bombshell of another kind emerged with the ANM's notification to Vale, whose ADRs trade on the NYSE, demanding R$17.7 billion in mining royalties — an amount the miner disputes in full, stating that it regularly remits CFEM and that the charges "have no basis." The company has ten days to pay, arrange installments, or contest; otherwise, the ANM may enroll the debt as active tax liability. This is one of the largest regulatory claims against a private company in recent Brazilian history, and its resolution — whatever it may be — will have implications for the investment environment in mining at a moment when the country seeks to position itself as a strategic supplier of critical minerals. A study by Amcham released this week projects that the development of this sector could add R$192 billion to GDP and generate 750,000 jobs by 2050, provided Brazil attracts foreign capital and advances domestic mineral processing — a thesis that the regulatory dispute with Vale does little to bolster.

In the earnings season, the reading of bank balance sheets reveals a sharp divide between the strength of large lenders and the fragility of the consumer base. Itaú Unibanco reported recurring net income of R$12.4 billion in the second quarter, with an ROE of 24.3%, a performance described by the buyside as "classic Itaú" — solid, without surprises, credit quality preserved. Bradesco completed its tenth consecutive quarter of profit growth, with R$7.05 billion and an ROE of 16.2%, but marginal deterioration in some quality indicators sent the shares down 2.22%. CEO Marcelo Noronha himself was explicit: the bank is prioritizing collateralized lines, especially CLT payroll-deductible loans, which grew 90% in the year, and reducing exposure in unsecured credit — a faithful portrait of a financial system growing cautiously in an economy of record household indebtedness.

In the airline sector, the war in Iran continues to impose severe costs. Azul, Gol, and Latam have accumulated R$5.2 billion in extra fuel expenses since the conflict began in late February, with the most recent 1.9% increase in jet fuel announced by Petrobras last week further pressuring margins. Analysts are awaiting Petrobras's own earnings on Thursday, whose shares trade on B3 and NYSE, with expectations of EBITDA between US$18 billion and US$19 billion in the second quarter and a distribution of around US$3 billion in dividends — a result that reflects record production driven by prices sustained by the geopolitical conflict that bleeds the airlines.

The tax reform also delivered an uncomfortable surprise: the Management Committee of the IBS and CBS estimated the reference rate of the new system at 27.91% — above the 26.5% ceiling foreseen in the regulation. The difference may seem small, but it signals that the design of the new tax model, sold as simplifying and neutral, may raise the effective burden on consumption of goods and services, complicating fiscal planning calculations for companies and investors.

In the coming weeks, three axes will deserve special attention: the Petrobras earnings and the unfolding of the Vale case, which together will carry disproportionate weight on the Ibovespa; US inflation and labor market data, which will determine whether Warsh's Fed will indeed tighten in September; and the fiscal positioning of the Lula government as the electoral campaign approaches — the variable that, more than any other, will define how far the Central Bank can go in this cutting cycle.

**Axia Energia (B3: AXIA3; NYSE: ADRs delisted on August 6)** — The former Eletrobras reversed a loss of R$1.32 billion into a profit of R$1.19 billion in the second quarter, driven by better conditions in the free energy market and a reduction in provisions. The board concurrently approved the redemption of R$2 billion in class "C" preferred shares, corresponding to 6.14% of the class, at a price of R$53.71 per share — Thursday marked the last trading day of its ADRs on the NYSE.

**Vale (B3: VALE3; NYSE: VALE)** — The miner was notified by the Agência Nacional de Mineração to pay or contest R$17.7 billion in mineral exploration royalties within ten days, one of the largest regulatory claims ever directed at a private company in Brazil. Vale contested the charge in full, stating that it regularly remits CFEM and that the amounts "have no basis."

**Bradesco (B3: BBDC4; NYSE: BBD)** — The bank reported recurring net income of R$7.05 billion in the second quarter, its tenth consecutive advance, with an ROE of 16.2% and a credit portfolio expanded by 11.6% over 12 months, led by CLT payroll-deductible loans growing 90% in the year; shares fell 2.22% in the session on signs of marginal deterioration in credit quality in the rural segment and in lines backed by public fund guarantees.