Brazil Economists Anticipate Rate Hike Amid Stronger Growth, Ending 11-Week Stability Streak

By Marcela Ayres

BRASILIA (Reuters) – Brazilian economists surveyed weekly by the central bank have adjusted their expectations in line with future interest rate pricing, now anticipating a rate increase at this month’s monetary policy meeting due to stronger-than-expected economic performance.

This shift ended an 11-week period during which over 100 professionals surveyed had consistently forecasted that the benchmark interest rate, known as the Selic, would remain at the current 10.50% level through the end of the year.

The change in outlook follows unexpected growth in Latin America’s largest economy during the second quarter, leading to several upward revisions for this year’s economic expansion.

According to the latest survey from the central bank, expectations are now set for a 25-basis-point increase in each of the three remaining rate-setting meetings this year, with borrowing costs projected to close 2024 at 11.25%.

"This scenario highlights the market’s concern about striking a balance between economic growth and inflation control, suggesting a higher interest rate environment is necessary to manage inflationary pressures," remarked Arnaldo Lima, economist and head of institutional relations at Polo Capital Management.

In a report released on Monday, Bank of America adjusted its interest rate outlook, now anticipating a 25-basis-point hike at next week’s meeting, followed by two additional increases of 50 basis points each by December. This marked a departure from its earlier prediction of steady rates for the remainder of the year.

"Four main reasons drive this change in our perspective: inflation expectations have not declined in recent weeks, the Brazilian real has remained above 5.50 per dollar, economic growth has surprised on the upside, and the local yield curve is fully pricing in a hike for the next monetary policy meeting," stated the BofA team led by David Beker.

The central bank’s survey also indicated an extension of the tightening cycle into January, forecasting an additional 25-basis-point hike that would raise the Selic rate to 11.50% at the start of next year.

Some financial institutions had anticipated since August that policymakers would initiate a tightening cycle at the meeting scheduled for September 17-18, a scenario that was previously mirrored in yield curve pricing and currently suggests a 90% probability of a 25-basis-point increase in the upcoming decision.

Last week, the bank’s economic policy director, Diogo Guillen, emphasized that policymakers had observed stronger economic growth since their latest meeting, with the exchange rate "a bit higher" and inflation expectations remaining largely unchanged but not firmly anchored, raising concerns for the future.

The weekly survey also revealed that respondents have raised their gross domestic product forecasts for this year to 2.68%, up from 2.46% the prior week.

The following are projections derived from the survey: