Brazil's economy shrank for a second straight month. The Central Bank's Economic Activity Index (IBC-Br), a monthly proxy for GDP, fell 0.2% in July from June on a seasonally adjusted basis, the bank said on Wednesday (16). The reading came in worse than expected: a Reuters poll had projected a 0.1% drop, according to Folha de S.Paulo.

The drop, which followed a 0.9% contraction in June, was concentrated in farming. Agriculture and livestock fell 1.2% in July, the largest decline among the three sectors tracked by the index; industry slipped 0.4% and services were flat. That reverses the sector's role in the previous quarter, when official GDP grew 0.5% pulled by agriculture, according to the IBGE, Brazil's statistics agency.

In cumulative terms, activity is still expanding. The IBC-Br rose 1.1% in July from July 2025 and advanced 1.5% in the year to date and another 1.5% over 12 months, the Central Bank said, using figures without seasonal adjustment. For the full year, analysts heard by g1 project growth of about 1.9%, against 2.3% in 2025.

The index and interest rates

The IBC-Br is built from estimates for farming, industry, services and taxes; the demand side, which enters the IBGE's GDP calculation, is left out. The index is one of the tools the Central Bank uses to set the Selic, Brazil's policy rate: hotter activity pushes prices up and holds back monetary easing. In an election year, the federal government is fueling consumption with income tax exemptions for salaries up to R$ 5,000, the release of FGTS severance funds and cheaper credit. The Central Bank, for its part, has said a slower economy is part of its strategy to contain inflation. In the minutes of its latest Copom meeting, released in August, it judged that the economy still operates above potential. On Wednesday the rate-setting committee meets again, and markets project a fifth consecutive Selic cut, to 13.75% a year.

For farmers, July shows the sector switching roles: from the engine of second-quarter growth to the main drag on activity. For consumers, the effect runs through the other side of the chain. In the Central Bank's reading, weaker activity eases price pressure and shortens the path of interest rate cuts already under way. The cost is an economy growing more slowly until inflation gives way.