Brazil’s benchmark interest rate risks staying above 10% per year until at least 2028 unless the government implements a real budget adjustment. That assessment comes from former Central Bank President Gustavo Loyola, who pointed out that monetary authorities lack the power to stop inflation fears if public spending continues on an unchecked upward path.
Why does Gustavo Loyola forecast double-digit interest rates through 2028?
The Selic rate cannot fall back to structurally low levels because public account imbalances constantly fuel the risk premium demanded by the market. Appearing on the Stock Pickers videocast, hosted by Lucas Collazo, Loyola explained that attempting to stabilize inflation solely through monetary policy runs into severe technical limits when the budget side remains out of control.
In the economist's view, the central bank ends up overburdened and isolated in steering macroeconomic stability. When rates rise to try to curb prices, the cost of rolling over public debt jumps immediately. If the state does not offset this extra expense by generating a primary surplus, the total liabilities grow even faster, forcing investors to demand even higher rates on government bonds to keep financing the public apparatus.
“It does no good to have a horrific, terrible fiscal situation while the central bank wants to hold the economy together and shoulder the whole burden through interest rates alone. One swallow does not make a summer; the central bank cannot shoulder the burden by itself.”Gustavo Loyola, former central bank president, on Stock Pickers
For anyone tracking the daily movement of the Selic rate today and the next Copom meeting, the statement sums up the bind facing monetary authorities: high benchmark rates cease to be a temporary remedy and become a chronic symptom of the National Treasury's lack of credibility.
What is the fiscal vicious circle described by the former central bank chief?
The vicious circle pointed out by Loyola describes a dynamic in which state indebtedness feeds off the interest rate without any brake on primary expenses. When fiscal spending remains accelerated, the financial market demands higher returns to hold longer-term government paper. This dynamic turns into a financial snowball that monetary authorities cannot escape simply by hiking the short-term rate.
This mechanics is already visible in the forward interest rate curve and the country's solvency indicators. Because the economic team fails to deliver consistent budget cuts, the market prices long maturities at high premiums—a direct reflection of a point where Brazil's gross debt reaches 82.93% of GDP. Without a credible fiscal anchor, any political pressure on the central bank board to force a premature rate cut would only amplify distrust regarding future inflation.
How does the warning hit stocks and the financial market today?
Stress in Interbank Deposit (DI) futures contracts directly affects the opportunity risk of investing in risk assets, penalizing the stock exchange. The fallout from Loyola's warning coincided with another sell-off on the B3: the Ibovespa index dropped 0.75%, closing at 167,921.80 points, pressured by a general aversion to local assets.
The move continues the recent volatility seen since DI rates jumped in the first post-election week. Investors projecting the discounted cash flow of listed companies must bake in much higher risk-free rates, which crushes equity market multiples and dampens the appetite for more aggressive positioning.
Double-digit rates sustain robust, secure returns in post-fixed debt with daily liquidity.
Units discounted by interest rate stress create a long-term entry point with an attractive premium.
Yet while equity valuations suffer in the short term, persistently high interest rates open up very clear tactical windows for investors seeking real returns and capital preservation.
What does this mean for your investments?
Prolonged high interest rates change the ideal weight of each asset class in your portfolio, rewarding patience and penalizing leveraged bets.
With the Selic rate in double digits for longer, liquidity reserves stop being just a safety net and become a powerful engine for returns, supporting a 25% portfolio allocation. By contrast, real estate investment funds (FIIs) continue to trade at significant discounts to net asset value: maintaining or increasing exposure to FIIs up to the 25% threshold allows investors to lock in high yields and capture substantial capital gains when the cycle finally turns.
In traditional fixed income, inflation-linked bonds (IPCA+) with medium maturities remain attractive by offering real yields above their historical average, while long-term fixed-rate bonds demand extreme caution, as market-demanded premiums could still expand if the government continues failing to curb spending.
Gustavo Loyola’s warning is not rhetorical pessimism, but a cold calculation of Brazilian fiscal math: without primary spending controls, the central bank is forced to keep the emergency brake pulled. For retail investors, 2028 sounds distant, but the strategy starts now: keep a robust cash cushion earning daily liquidity while accumulating shares of discounted, resilient brick-and-mortar FIIs and stocks as the market digests the fiscal noise.