Bank of America expects Selic to end the year at 11.75%

Investing.com – Bank of America  has adjusted its projections for Brazil's basic interest rate and now expects the Selic rate to close the year at 11.75%. As such, the expectation is that the Central Bank's Monetary Policy Committee (Copom) will increase the rate by 0.25 percentage points next week, initiating a tightening cycle, according to a report released to clients and the market on Monday.

"We expect Brazil to increase rates while other central banks are cutting, which may further reduce the pressure for future increases," the bank stated in the report.

Besides the increase in September, the projection is for two subsequent half-point increases and a final 0.25 percentage point hike in January, reaching a peak of 12% in January 2025.

"As the Fed and other central banks are expected to cut interest rates, there is a risk of fewer increases for Brazil. We maintain the view that interest rates in Brazil are already above neutral," highlighted economists David Beker, Natacha Perez, and Gustavo Mendes.

BofA estimates inflation at 3.9% in 2024 and 3.6% in 2025. Inflation expectations, the dollar being above R$5.50, higher-than-expected activity levels, and the pricing of the interest rate curve are among the reasons for the bank's projection change. They believe that the tightening cycle "should help re-anchor inflation expectations and reinforce the credibility of the Brazilian Central Bank."

The economists noted the robustness of economic activity, with a strong labor market, credit acceleration, and strong demand, in addition to the boost from fiscal policy.

"We believe that local interest rates above neutral, combined with less fiscal impetus, will lead to a slowdown in economic activity," the economists added, mentioning upside risks to their growth estimate of 2.7% this year and downside risks to their 2.5% forecast for 2025.

On Monday, the Central Bank's Focus Bulletin report showed that economists consulted by the monetary authority raised their expectations for the Selic basic interest rate at the end of 2024 from 10.50% to 11.25%.