Political Shockwaves: How Brazil's 2026 Election Uncertainty Sent the Ibovespa Plunging and Hiked Selic Rate Forecasts

Brazilian financial markets experienced one of their most turbulent sessions in recent history last Friday, as political developments in Brasília reignited deep-seated concerns over fiscal policy, monetary strategy, and long-term economic planning. The market's reaction was swift and severe: the benchmark Ibovespa index suffered a dramatic drop — after a series of record highs, the Ibovespa B3 experienced a drop of more than 4% —, while the Central Bank's latest Focus Report reflected this new wave of instability by signaling higher expectations for the Selic rate in 2026. This shift underscores how political uncertainty in Brazil directly translates into heightened risk premiums and a more restrictive monetary outlook.

Political Volatility Reshapes Monetary Outlook

For weeks, the financial community had been anticipating a potential easing cycle in Brazil's monetary policy, hoping for lower interest rates ahead. However, Friday’s political shock abruptly reshaped these expectations.

The catalyst was the early, and later confirmed, report that Flávio Bolsonaro would be the chosen presidential candidate for the 2026 election. This news immediately fueled investor anxiety regarding economic unpredictability, particularly concerning fiscal management in a potential 2027 administration led by the candidate.

The weekly Focus Report, compiled from projections by over 100 financial institutions, now signals a reversal of the recent downward trend in interest rate forecasts. A month prior, the market projected the Selic rate to end 2026 at 12.25%. Following the political sell-off, projections have jumped, reflecting the market's need to price in additional risk.

The Ibovespa's Steepest Decline Since 2021

The Ibovespa had been on a record-setting streak, briefly touching 165,000 points early in the session. The news of the potential Bolsonaro-aligned candidacy triggered a swift and severe reversal, resulting in one of the index's sharpest single-day drops since 2021.

The index plunged from nearly 165,000 points to 154,000 points. This massive sell-off was driven by fears that a politically motivated administration could undermine fiscal predictability, especially when compared to expectations surrounding other potential contenders, such as São Paulo governor Tarcísio de Freitas, who is widely viewed by markets as a more technocratic and fiscally disciplined option — in fact, Tarcísio de Freitas is even more radical than Bolsonaro when it comes to the economy. In São Paulo, the government even privatized the water supplier company (Sabesp). The governor also established a public security policy marked by dozens of cases of police brutality. There were cases where police officers threw a citizen off a bridge and also a police operation in Guarujá, in the Baixada Santista region, where 38 people from a poor community were killed by the police. On that occasion, Tarcísio said he was "extremely satisfied" with the police action.

Analysts highlight that the connection between political risk and monetary policy is direct: political uncertainty and a lack of clarity on economic plans increase the country's risk premium. The Central Bank, in turn, tracks these risks closely, as political turbulence affects asset pricing, the currency, and overall investor confidence. Consequently, expectations of unstable fiscal policy push long-term interest rates higher, forcing the market to price in a higher Selic rate to compensate for the added risk.

Focus Report Quantifies Risk: Higher Selic in 2025

The latest Focus Report, released this week, provides a clear quantification of the market's revised expectations. While inflation and GDP growth forecasts remain relatively stable, the outlook for the Selic rate has been revised upwards for 2025.

Metric	2024/Forecast	2025/Forecast
Inflation (IPCA)	4.40%	4.16%
GDP Growth	2.25%	1.80%
Exchange Rate (BRL/USD)	5.40	5.50
Selic Rate	N/A	12.25% (Revised Up)

Source: Central Bank Focus Report, December 2025

The upward revision of the Selic rate for 2025 (from 12.00% to 12.25%) confirms that the market is now less certain about the speed and depth of the current interest-rate cutting cycle. Analysts broadly expect rate cuts to resume in 2025, but the political noise has pushed the anticipated start date from January to March.

Structural Hurdles: Why Brazil's Interest Rates Remain High

The recent volatility has forcefully resurfaced the broader debate over Brazil's structural economic challenges. Despite a global trend toward lower policy rates, Brazil remains burdened by high structural rates due to several persistent factors:

1. Low Productivity and Supply Constraints: The country's economic structure lacks dynamism and struggles to adjust supply to rising demand, making it highly susceptible to inflationary pressures.
2. Tight Inflation Target: The inflation target was arbitrarily lowered during the Temer administration (from 4% with a 2-point band to 3% with a 1.5-point band) without corresponding structural improvements in the economy.
3. Aggressive Monetary Response: A tighter inflation target necessitates a more aggressive interest-rate response from the Central Bank, even when inflation is driven by supply-side issues rather than excess demand.

In essence, Brazil's combination of low productivity, deindustrialization, and a narrow inflation band all contribute to keeping interest rates stubbornly high, making the economy highly sensitive to political risk.

Navigating the Political-Economic Crossroads

The immediate future holds a high-stakes "Super Wednesday" with key decisions from both the U.S. Federal Reserve (Fed) and Brazil's Monetary Policy Committee (COPOM). The Fed is widely expected to cut rates, which would ease pressure on emerging markets. While COPOM is not expected to signal immediate cuts, analysts will scrutinize its tone for any subtle shift that might leave the door open for reductions later in 2025.

While Friday’s drop may have been an overreaction, early trading this week showed a partial recovery, with long-term yields dropping and the Ibovespa attempting a rebound. Nevertheless, markets will remain in a holding pattern, highly sensitive to both the COPOM decision and any further developments in the volatile political landscape ahead of the 2026 elections.

Bolsonaro's disapproval reaches 68%; 7 out of 10 Brazilians don't trust the president or the government

A new poll by Ipec shows that 69% of Brazilians do not trust President Bolsonaro.

Ipec, the research institute headed by Márcia Cavallari, researched two scenarios for the 2022 elections. In both, Lula can win the 2022 presidential elections in the 1st round.

According to the survey, Lula leads the 1st round in 2022 with more than 20 points ahead of Bolsonaro.

Also according to Ipec, Lula would have more votes than the total of all other candidates combined.

Busy weekend in Latin America, with Lula out of prison in Brazil and Evo Morales resigning from office in Bolivia; Brazilian financial market reacts badly, Bovespa falls and the dollar opens in fall in Brazil this Monday

The crisis in Bolivia, Lula's exit from prison and infrastructure projects are the main issues in Brazilian newspapers this Monday. The State of Sao Paulo states that Evo and three others in the power line resign in Bolivia; Globo publishes that Evo Morales resigns under protests and military pressure and Correio Braziliense reports that Evo Morales resigns and Bolivia is left without government; according to Folha de S.Paulo says that Lula will start a series of trips around the country starting in Pernambuco, in the Brazilian Northeast; and Valor Econômico reports that only 6% of cities meet basic sanitation goals.

Pressured by opponents, police, and military, Evo Morales left Bolivia's presidency after nearly 14 years in power. After he left power, there was a cascading departure from the authorities that formed the constitutional succession line. This has created an unknown about who will take over the government in the country.

Lula

According to the president of Cebrap (Brazilian Center for Analysis and Planning) and philosophy professor at Unicamp (State University of Campinas), Marcos Nobre states that with the release of former president Luiz Inácio Lula da Silva, the country's political scenario changes completely. For him, the PT, Lula's party, should present an opposition program to President Jair Bolsonaro.

Former President Lula has said he will oppose the government of Jair Bolsonaro. That means new pressure movements on the already weakened government. Lula represents a larger organization of the opposition to the government, which until now was disorganized. Since the government of Jair Bolsonaro has great difficulty defending its theses in the Brazilian Congress, the reinforcement and reorganization of the opposition could make even more difficult the economic change projects proposed by the current government.

Basic sanitation in Brazil

Meanwhile, in Brazil, according to the Valor Econômico newspaper, only 6% of Brazilian cities meet the basic sanitation goals of the new sanitation legal framework. Of the 5,570 Brazilian cities, only 343 already have a sanitation coverage rate above 90% for water supply and 60% for sewage collection and treatment.

The financial market in Brazil falls due to the inability of the Bolsonaro government to calm the country

The Brazilian stock market operated today below 90,000 points, the lowest level since January 3, 2019. In a few months, President Jair Bolsonaro burned much of the support he received from the financial market.

The economic deterioration in the Brazilian scenario, the commercial war between the US and China, the Brazilian government's inability to carry out reforms and the huge demonstrations that took place yesterday in several Brazilian cities showed the fragility of the current government of Jair Bolsonaro.

For that reason, in the coming weeks in Brazil, the country's economic scenario should be marked by volatility in the financial market. There is nothing that can reassure the Brazilian financial market in the short term.

To many analysts, the president Jair Bolsonaro has moved beyond any limits after he called thousands of people who took to the streets to speak out against cuts in the education of idiots and imbeciles.

To make matters worse, Flávio Bolsonaro, who is senator and son of the current president seems to be involved in a corruption scandal. Yesterday, a report from the Rio Public Prosecutor's Office (MPRJ) pointed out that there are indications that Flávio Bolsonaro bought and sold real estate to launder money.

Brazil: a desert of economic ideas

The current Brazilian economic scenario is catastrophic after years of low economic growth, fiscal uncontrol, and high unemployment rates. The whole contingency of the government that now hits hard federal universities and is sold by the government as a measure to try to cover the gap in the economy conceals, in fact, the lack of economic proposals of the current government for Brazil to leave the crisis frame in which is found.

The government uses the approval of the Pension Reform as the great measure capable of making Brazil grow again. The previous government, of president Michel Temer (who is back to jail in corruption probe), sold the labor reform in the same way. The then Minister of the Economy Henrique Meirelles went so far as to say that the reform would produce 6 million new jobs, but what actually occurred was the rise in unemployment.

Weak macroeconomic data are the result of the lack of proposals by the current government and the orthodox reforms adopted since the arrival of Joaquim Levy to the Brazilian Ministry of Economy during the second Dilma government in late 2014. Levy, now president of the BNDES, initiated a series of orthodox economic measures. Since there should be no Bolsonaro government spending increasing demand and Brazilian entrepreneurs do not seem willing to bet on the Brazilian economy, in the medium term the Brazilian economy should remain weak.

All indications are that in the coming months' recessive adjustments will continue amid the scrapping of Brazil's physical and social infrastructure.

Bolsonaro says that investing in Brazil is a very risky sport

According to Folha de S.Paulo newspaper, in a meeting with governors and the two presidents of the Legislature today, Brazilian President Jair Bolsonaro said investing in Brazil is a very risky sport. According to the Brazilian president, this is because of the bad economic situation facing the country.

This kind of statement helps the country very little. The chief executive should explain solutions to the economic crisis facing the country. Words produce concrete consequences as quoted by the chief executive.

The Brazilian president should be focused on national interests and presenting solutions. So far, the government indicates that the only way out of the crisis is to approve the Pension Reform. No other economic measure considered relevant, apart from the Pension Reform, was presented and defended by the current government.

Investors fear lack of political articulation of the Bolsonaro government

Jair Bolsonaro was never a liberal. During the more than two decades in which he has been a federal deputy in Brazil, his political performance has always been close to interventionist policies.

There is an evident difficulty of the president in defending the liberal agenda of the minister Paulo Guedes. To make matters worse, it is also very evident that the current president does not believe much of this agenda. For this reason, Bolsonaro defends little or almost nothing the agenda of its own government.

The CCJ stage in the Pension Reform, which was seen as something easy, ended up becoming very difficult for a disjointed government.
This has helped to worsen many of the country's growth projections. The government's ability to implement the reforms advocated during the campaign produced dismay among Brazilian and foreign investors.

The deterioration of the Brazilian economy will make even more difficult the life of a government that until now has been completely disarticulated in the political plane.

This picture produced a lot of reluctance from foreign investors to bet on Brazil, especially after it became clear the Brazilian government will not be able to produce the liberal shock that the market expected. As a result, Brazil will be experiencing continued volatility in the coming days.

Bolsonaro's government decides to interfere in fuel prices

Petrobras had announced that the average liter value of the fuel would rise 5.74% from today. However, the government of President Jair Bolsonaro, who until then claimed to be liberal in the economy, prohibited that the increase was applied.

The government fears a new strike by truck drivers like the one that stopped the country in 2018.

According to analysts, this measure hinders the work of reduction of debt and sale of assets made by Petrobras in recent years. The interference, very similar to the one made by the Dilma Rousseff government, can greatly harm the health of Petrobras. Petrobras' stock prices are expected to reflect this interference negatively. This should also drive the performance of the financial market in Brazil today and in the coming days.

In addition, the government also waved at the possibility of creating a tax on all financial transactions in Brazil. This should also be not welcomed with many criticisms of the Brazilian financial market.

The promise to reduce taxes made during the campaign of Jair Bolsonaro to the presidency generated many expectations in the Brazilian financial market. If the new tax is presented by the current government, the tendency is for the Brazilian financial market to take a more critical stance on the government.

Jair Bolsonaro has worse evaluation among presidents of first mandate since the democratization

According to the Datafolha research institute, 30% of Brazilians consider the Bolsonaro government bad, a rate similar to those who considered the government good (32%) or regular (33%).

In 100 days of rule, Bolsonaro's approval fell from the 49 percent expected to be a good government, from January's Ibope poll to the current 32 percent who think his government is a good government according to Datafolha.

According to analysts like Vinicius Torres Freire, the "frustrations of 2019 could lead the country to the fatigue of an economic adjustment that has not yet occurred."

Added to this, according to FT, is the fact that China started to boost purchases of US agricultural products, including 1.7 million tons of soy and 178 thousand bales of cotton that were previously imported from Brazil.

In recent years, agribusiness exports have ensured surpluses in the trade balance.

During the presidential campaign, Bolsonaro portrayed China, Brazil's largest trading partner, as a "predator who seeks to dominate key sectors of the Brazilian economy." The speech of the then-candidate was very badly received by the Chinese government.

Multimarket funds lose money with tumultuous scenario of Brazilian politics

The constant crises and lack of political skill of Jair Bolsonaro's government led the Brazilian Financial Market to re-evaluate and recalculate the risks of the current administration.

A study made by SmartBrain on Brazilian multimarket funds, covering the period of the new government, indicated that multimarket funds began the year very optimistic with a possible liberal policy and reduction of the state sold during the political campaign by then-candidate Jair Bolsonaro.

The oscillation and the altercations between the Executive Power and the Legislative Power in Brazil led the funds to lose money. Only 28% of the funds had positive returns in the first months of the Bolsonaro administration.

As nothing indicates any change in the directions of inflation and as promises and expectations about the new government did not occur, the funds that stood for economic growth ended up losing money.

A turmoil in the political scene made the funds change to dólar. Therefore, the funds that were betting on the "kit Brazil" (appreciation of the Brazilian currency, investment in the Stock Exchange and the fall of the Brazilian interest rate) lost money.

Dollar reaches R$ 4.00 and scares Brazilian economists

A public discussion between the President of the Republic Jair Bolsonaro and the president of the Chamber of Deputies Rodrigo Maia made the financial market nervous this week.

Yesterday, March 28, the tourism dollar reached R$ 4.20 and euro at R$ 4.70. As a result, the day was turbulent in the Brazilian financial market.

Today, March 29, the commercial dollar opened the session with a fall of 0.84%, being traded at R $ 3.8830 for sale and R $ 3.8810 for purchase.

To make matters worse, unemployment continues high despite improvements in recent months. In the quarter ended in February, the unemployment rate in Brazil was 12.4%, according to data from the National Survey for Continuous Household Sample (Pesquisa Nacional por Amostra de Domicílios Contínua - PNAD) published today by the Brazilian Institute of Geography and Statistics (IBGE). In the same period in 2018, the unemployment rate measured by PNAD was 12.6%.

According to Eduardo Moreira (former partner of Banco Pactual), there is a fugue of investors from  Brazil. For Moreira, a critic of the Bolsonaro administration, the first three months of government did not present any type of project and indicated a fragility in the president's capacity for articulation with the National Congress.

The Bolsonaro paradox

The British magazine, The Economist, on its front page claims that a victory by right-wing candidate Jair Bolsonaro would be a catastrophe for Brazil.

Paulo Guedes, the economist responsible for the Bolsonaro government plan, said yesterday that a future Bolsonaro government will come back with a tax called CPMF, which will collect a portion of any financial transaction made in Brazil. Bolsonaro, meanwhile, spent the entire campaign stating that he will not raise taxes if elected.

Paradoxically, the right-wing and ultraliberal Bolsonaro leads the polls in a country where the population is largely against an ultraliberal government. Research indicates that most Brazilians want health and education services to be public. Programs such as Bolsa Familia, which protects people against hunger, are also widely aproved by the population.

Because of this, renowned statistician Paulo Guimarães, who helped countless politicians win elections in Brazil, believes that Bolsonaro may not make it to the second round of elections. In an interview for El Pais Brasil, Guimarães said that Bolsonaro's votes are not "of competence". They are "protesting, hateful against the other side".  For Guimarães, "the highest loyalty among the candidates is that of the Bolsonaro, but there is a very fluctuating part there, which is there because of hatred. If the voter realizes that he can win from the PT without hatred, he can change, but for that, one of those other center candidates has to appear with a vote that gives hope to the voter". 

Candidates from the center-left and center-right, such as Ciro Gomes and Geraldo Alckmin, respectively, have a few days to try to change that picture and win undecided voters and those who are not so loyal to Bolsonaro.

Presidential elections in Brazil

The election to the presidency of the Republic of Brazil is headed for a second round marked by radicalism. The left-wing candidate and the Workers' Party (PT), Fernando Haddad, former Minister of Education of Govern Lula and former mayor of the city of São Paulo, adopted a more radical agenda, which advocates raising taxes for the rich, democratization of the media, fight against the banking monopoly — in Brazil only five banks are responsible for 80% of the country's financial operations.

On the other side is Jair Bolsonaro from the tiny PSL, Partido Liberal Social, adopts an agenda that for many political analysts is far right. According to Celso Rocha de Barros, a doctorate in sociology from the University of Oxford, said on the last day in the newspaper Folha de S. Paulo that Bolsonaro's followers want to do a coup.

Bolsonaro, an ex-military man who has been in Brazilian politics for about 30 years and has been elected federal deputy many times, has spent the last few days adopting a speech that does not recognize the results of the election if not the winner. . His deputy, Colonel Mourão, also ex-military, said that if elected, will make a new constitution without the participation of the population, that is, according to Mourão, his government will make a new constitution made by a commission of notables.

If the dispute between Haddad and Bolsonaro is confirmed in the second round, Brazil will leave the election with a more radical government for both left and right. The question is: the country that is coming from a deep and deep recession will enter 2019 with a very difficult political agenda, regardless of who is elected.