Bank of America Projects Selic to Conclude the Year at 11.75%

Bank of America has revised its forecasts for Brazil’s basic interest rate, now predicting that the Selic rate will end the year at 11.75%. This adjustment suggests that the Central Bank’s Monetary Policy Committee (Copom) is likely to raise the rate by 0.25 percentage points in the upcoming week, marking the beginning of a tightening cycle, as indicated in a report released to clients and the market.

The bank mentioned, “We expect Brazil to increase rates while other central banks are cutting, which may further ease the pressure for future hikes.”

In addition to the anticipated September increase, Bank of America forecasts two additional half-point rate hikes and a final increase of 0.25 percentage points in January, leading to a peak rate of 12% by January 2025.

The report emphasized concerns that as the U.S. Federal Reserve and other central banks are expected to reduce interest rates, Brazil might experience fewer increases. Economists David Beker, Natacha Perez, and Gustavo Mendes noted, “We maintain the view that interest rates in Brazil are already above neutral.”

The bank predicts inflation will reach 3.9% in 2024 and 3.6% in 2025. Factors such as inflation expectations, the dollar remaining above R$5.50, unexpectedly high levels of economic activity, and interest rate curve pricing influenced their projection change. The tightening cycle is expected to help stabilize inflation expectations and enhance the credibility of Brazil’s Central Bank.

The economists also noted the robustness of the economy, highlighting a strong labor market, accelerated credit growth, and high demand, bolstered by fiscal policy.

They cautioned, “We believe that local interest rates above neutral, along with reduced fiscal support, will slow down economic activity,” while identifying both upside risks to their 2.7% growth estimate for this year and downside risks to their 2.5% forecast for 2025.

Recently, the Central Bank’s Focus Bulletin revealed that economists surveyed by the monetary authority have adjusted their expectations for the Selic rate at the end of 2024, raising it from 10.50% to 11.25%.