Brazil’s market rout following the reelection of Luiz Inacio Lula da Silva has clouded the prospect of cheaper credit, leaving the country's central bank to weigh inflation risks against painfully high borrowing costs.

Policymakers at Brazil's central bank begin a two-day meeting on Tuesday, with Wednesday’s decision offering an early test of how the election has changed the rate outlook. The committee has cut rates by 25 basis points at each of its last five meetings.

Over Lula’s next four years, convincing investors he can keep public finances in check while protecting social spending will be crucial to bringing financing costs down. Failure could keep credit expensive for longer, complicating efforts to support growth.

A Reuters poll found 33 of 48 economists expected the central bank to hold its benchmark rate at 13.75% on Wednesday. Median forecasts showed rates remaining there until the second quarter of 2027.

For Carlos Carranza, an emerging market debt fund manager at M&G Investments, the central bank's message matters more than whether it holds or cuts rates by 25 basis points.

“Whether they do 25 (basis points) or they stay put, I think the message will be even more important than the actual policy rate,” he said.

Cutting rates without acknowledging the risks from the real’s slide would be damaging, Carranza said, though he did not expect policymakers to do so.

Last week, the real lost 8.5% against the US dollar and the benchmark Bovespa stock index (.BVSP) shed about 18% as Lula’s victory overturned bets on a win for right-wing challenger Flavio Bolsonaro.

Those bets had fueled a rally after Bolsonaro unexpectedly led the first round, reflecting hopes for tighter public finances. Investors must now gauge how far Lula is willing and able to tighten fiscal policy.

Petar Atanasov, co-head of sovereign research & strategy at Gramercy Funds Management, still sees room for fiscal adjustment under Lula, but expects it to be slower than investors had anticipated under Bolsonaro.

“The speed and the scale of the adjustment will be very different," he said. Meaningful adjustment would require curbing the growth of mandatory spending and building support in Congress, he added.

Antonina Tarassiouk, director of international economic analysis at Reams Asset Management, also expects a pause, saying the election has made the inflation outlook more challenging, particularly if oil remains above $100 a barrel.

Prices in Latin America's largest economy rose 4.62% in the year through mid-October. Government interest payments reached 9% of GDP in the year through September, the highest share since January 2016. Household debt hit a record 50.1% of annual income, while repayments consumed a record 29% of income, central bank data showed last week.

A weaker real raises import costs, potentially feeding into consumer prices. Whether that pressure persists will depend partly on Lula’s economic appointments and the fiscal policy his government pursues.

M&G’s Carranza, however, sees inflation as contained and fiscal uncertainty as the bigger obstacle to lower borrowing costs. He sees growth as resilient in contrast to Tarassiouk’s weaker outlook for 2027.

“Downward revisions to an already weak growth forecast for 2027 will be key for the BCB to renew its easing stance,” Tarassiouk said.

Liam Peach, senior emerging markets economist at Capital Economics, estimates the real’s post-election depreciation could add 0.3 percentage point to headline inflation over six months. He expects rate cuts to pause rather than reverse.

“The bigger concern is the sharp rise in bond yields, which, if sustained, threatens to tighten financing conditions, compound Brazil’s fiscal problems and deepen the slowdown in GDP growth we expect next year,” said Peach.