Brazil's central bank is asking economists to put a number on El Niño, and the early answer is simple: it could keep inflation higher in 2026 and 2027, even though much of the impact still isn't in forecasts.
A Central Bank of Brazil (BCB) survey of nearly 100 economists, taken before last week's rate decision, points to a new driver of prices: weather. Respondents see inflation at 5.2% this year and 4.2% next year, both above the BCB's 3% target, and estimate El Niño could add 30 basis points to 2026 inflation and 40 in 2027. El Niño is a warming of Pacific waters that can shift rainfall, and economists think only part of its effect is reflected in projections so far, leaving room for upside surprises, especially in food. Citi has highlighted drought risk in Brazil's northeast that could hit crops like coffee, sugar, and citrus, while BTG Pactual, a Brazilian investment bank, warned a strong event could keep inflation sticky by nudging expectations higher and making price increases harder to reverse. That's awkward timing: the BCB cut its policy rate (the Selic) by 25 basis points to 14.25% and said it expects inflation to return to target only in the first quarter of 2028, arguing that supply-driven spikes are usually something it tries not to overreact to.
Why Weather Matters for Inflation
Weather-driven food inflation often shows up fast in headline prints, and if it lasts, businesses and workers can start treating it as the new normal when setting prices and wages. That “inertia” raises the risk that a one-off shock turns into a broader inflation problem, which matters more to investors than the initial bump. If markets think the BCB is easing while inflation expectations drift further from the 3% target, they tend to demand a higher inflation-risk premium. In practice, that can mean higher Brazilian government bond yields further out on the curve and a more fragile backdrop for the real, since both have to compensate investors for the chance inflation takes longer to re-anchor.
What It Means for Investors
For everyday investors, the key takeaway is that Brazil's inflation story is no longer just about monetary policy—it's also about the weather. The BCB's decision to cut rates while El Niño risks loom suggests the central bank is betting that supply shocks will fade on their own. But if food prices stay elevated and inflation expectations rise, the central bank may have to pause or reverse its easing cycle. That could hit Brazilian stocks and bonds, especially if global investors start to see Brazil as a riskier bet. The broader lesson: even in a world of central bank rate decisions, old-fashioned weather patterns can still move markets.
