BofA expects Brazil to raise rates while other central banks cut

THE BofA (Bank of America) revised its projections for the Selic rate. Now, the basic interest rate of the Brazilian economy is expected to reach 11.75% by the end of 2024. The report was released this Monday (September 9, 2024).

BofA economists David Beker, Natacha Perez and Gustavo Mendes note that interest rates in Brazil are above the neutral level, indicating a more cautious stance on future adjustments.We expect Brazil to raise rates while other central banks are cutting, which could further reduce pressure for future hikes.”, they stated.

BofA anticipates a tightening cycle, with a 25 basis point increase as early as next week. This decision contrasts with the global trend of interest rate cuts by other central banks. The report further suggests that Brazil will adopt a rate-raising strategy to re-anchor inflation expectations and reinforce the credibility of the Central Bank.

In addition to the September increase, two half-point increases are expected, followed by a final increase of 0.25 percentage points in January 2025, reaching a rate of 12%. This monetary policy responds to inflationary expectations, a dollar valued above R$5.50 and a more robust economic activity than expected.

Beker, Perez and Mendes highlight that, despite the trend of interest rates falling by Fed (Federal Reserve) and other central banks, Brazil may see fewer hikes due to external conditions.

BofA’s inflation estimate for Brazil is 3.9% in 2024 and 3.6% in 2025. Robust economic activity, evidenced by a strong labor market, accelerating credit and vigorous demand, in addition to a fiscal policy boost, contribute to this outlook.

However, there is a warning of a possible slowdown in economic activity due to local interest rates above neutral and a reduced fiscal impulse, projecting growth of 2.7% for this year and a risk of downside to 2.5% in 2025.

With information from Investing Brazil.