The drop in oil prices gave Brazil’s Central Bank some relief ahead of the Copom meeting. El Niño, now confirmed in the Pacific, brought back the uncomfortable question: how much is that relief worth when Brazilian inflation starts to depend on rain, heat, reservoirs, crops and roads?
The honest answer is that nobody really knows.
Analysts had already been treating El Niño as a relevant variable for inflation. XP placed the climate risk inside an already uncomfortable picture for the Copom: current inflation under pressure, sticky core measures, domestic activity reaccelerating, the exchange rate no longer helping and expectations still above target. Even with the decline in oil prices, XP sees the Selic easing cycle very close to a pause.
The problem is that El Niño does not enter models as a clean line in a spreadsheet. The event is known; the intensity of its effects is not.
The phenomenon usually changes rainfall patterns in Brazil, with higher precipitation in the South, drought risk in parts of the North and Northeast, more intense heat and irregular rainfall in the Center-West and Southeast. For the economy, that can mean higher food prices, greater wholesale volatility, pressure on freight, logistical risks, wildfires, higher energy consumption and uncertainty over hydroelectric reservoirs.
But translating all that into the IPCA inflation index is anything but simple.
Climate-driven inflation does not follow the Copom calendar, does not obey the national average and does not spread symmetrically across regions, crops and supply chains. Too much rain can be as inflationary as too little. The shock may appear first in fresh produce, then in grains, meat, freight or energy. It may be temporary. It may contaminate expectations. It may disappear before becoming a monetary-policy issue. Or it may be underestimated until it is too late.
Brazil’s Central Bank has already studied the relationship between climate and food inflation, using indicators such as the Oceanic Niño Index, or ONI, and precipitation variables to capture the effects of El Niño, La Niña and abnormal rainfall on food consumed at home.
The conclusion is useful, but uncomfortable: the magnitude changes dramatically from one episode to another. During the strong 2015-16 El Niño, the estimated contribution to food inflation was significant. In 2019, the impact attributed to El Niño was much smaller, while abnormal rainfall accounted for a relevant part of the increase. The lesson is not that climate matters little. It is the opposite. It matters so much that it does not fit into a fixed rule.
That is the provocation for the Copom. The inflation model may remain technically correct and still look incomplete in the face of a broad climate shock. Not because the model is wrong, but because the decisive variable is not a single variable. El Niño is climate, crops, energy, logistics, wholesale prices, exchange rates, expectations and fiscal policy all at once.
Brazil’s bigger question, therefore, is not only whether the Copom cuts rates by 25 basis points this week or pauses at the next meeting. It is why the country needs to keep interest rates so high to defend a target that is so hard to reach.
Brazil could have structurally lower interest rates. But with fragile expectations, a high fiscal premium, persistent services inflation and an ambitious target, every shock becomes a credibility test. The high Selic is less an isolated choice by the Central Bank than the symptom of a regime that asks too much of monetary policy.
El Niño makes that choice even more uncomfortable.
If the climate shock pressures food, energy and logistics, the Central Bank may acknowledge that interest rates do not make it rain. But it can hardly ignore second-round effects. The Selic does not prevent floods, refill reservoirs or improve river navigation. But it does act on expectations, wages, services, price adjustments, credit, demand and the exchange rate.
That is why climate uncertainty should be treated neither as an automatic reason for higher rates nor as something irrelevant. If the impact of El Niño is hard to measure, it is also hard to use it as certainty to argue that the Selic must stay higher for longer.
The Central Bank’s challenge is to recognize the limits of its models and expand the monitoring of food, energy, logistics and climate. In moments like this, the error band matters as much as the central forecast.
Oil may have given the Copom room for one more cut. El Niño may reduce that room soon after, by exposing the limits of monetary policy in the face of supply shocks.
In the end, Brazil’s problem goes beyond the weather: every shock becomes a credibility test — and every credibility test tends to prolong the period of high interest rates.
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