Bank of America Adjusts Brazil's Interest Rate Projection, Expecting 11.75% Selic Rate by Year-End
In a recent report, Bank of America has revised its forecast for Brazil's basic interest rate, predicting the Selic rate to reach 11.75% by the end of the year. This adjustment signals a potential tightening cycle by the Central Bank's Monetary Policy Committee (Copom), with an initial 0.25 percentage point increase expected next week.
The bank's report suggests that Brazil may raise rates while other central banks are cutting, which could alleviate pressure for future hikes. BofA anticipates two subsequent half-point increases following the September hike, culminating in a final 0.25 percentage point raise in January, ultimately reaching 12% by January 2025.
Economists at BofA, including David Beker, Natacha Perez, and Gustavo Mendes, believe that Brazil's interest rates are already above neutral, especially as the Fed and other central banks are likely to lower rates. The bank projects inflation at 3.9% in 2024 and 3.6% in 2025, citing factors such as inflation expectations, exchange rates, economic activity levels, and interest rate curve pricing.
The tightening cycle is expected to help stabilize inflation expectations and bolster the Brazilian Central Bank's credibility. Despite robust economic activity fueled by a strong labor market, credit expansion, and fiscal stimulus, the economists anticipate a slowdown in growth due to elevated interest rates and reduced fiscal support.
In light of these developments, economists surveyed by the Central Bank have increased their year-end 2024 Selic rate expectations from 10.50% to 11.25%. This shift reflects the evolving economic landscape and the potential impact of monetary policy decisions on Brazil's financial markets and overall economy.
Analysis:
Bank of America's revised interest rate projection for Brazil indicates a shift towards a tightening cycle, with potential rate hikes expected in the coming months. This adjustment could have implications for inflation, economic growth, and investment opportunities in the country. Investors and individuals should monitor these developments closely to make informed decisions regarding their finances and portfolios.