Brazil Economists Expect Rate Hike After 11 Weeks of Stability Amid Stronger Economic Growth

Brazilian economists now anticipate a rate hike at the upcoming monetary policy meeting, ending an 11-week streak of stable interest rate forecasts. This shift follows stronger-than-expected economic growth in the second quarter, prompting a series of upward revisions to Brazil's growth outlook.

Brazil Economists Forecast Interest Rate Hike Following Strong Economic Growth, Ending 11-Week Stability

The central bank's weekly survey of Brazilian economists has revealed that they have aligned their expectations with future interest rate pricing. They are now anticipating a rate rise at the monetary policy meeting this month, which will be held in response to stronger-than-expected economic data.

The change terminated an 11-week streak during which over 100 surveyed professionals had maintained their median forecast for the benchmark interest rate, the Selic, to remain at the current 10.50% level until the end of the year.

The alteration was precipitated by the unexpected growth of Latin America's largest economy in the second quarter, which sparked a series of upward revisions to this year's expansion.

The central bank's survey indicates that a 25-basis-point increase is anticipated in each of the three-remaining rate-setting meetings this year. Borrowing costs are expected to conclude at 11.25% in 2024.

"This scenario underscores the market’s concern about balancing economic growth with inflation control, and points to a higher interest rate environment to contain inflationary pressures," said Arnaldo Lima, economist and institutional relations chief at Polo Capital Management.

Bank of America Predicts Rate Hikes Amid Stronger Growth, Inflation Concerns, and Rising Real

In a September 9 report, Bank of America revised its interest rate prognosis. It anticipates a 25-basis-point increase next week, followed by two hikes of 50 basis points by December. It had previously requested consistent rates for the current year.

"Four key factors support the change in our view: inflation expectations failed to decline in recent weeks, the Brazilian real remained above 5.50 per dollar, growth surprised to the upside and the local yield curve is fully pricing a hike in for the next Copom meeting," the BofA team led by David Beker wrote.

The central bank survey also indicates that the tightening cycle will continue into January, with an additional 25-basis-point increase bringing the Selic rate to 11.50% at the start of the following year.

Since August, certain institutions have anticipated that policymakers would initiate a tightening cycle at the September 17-18 meeting. This scenario was previously reflected in yield curve pricing, indicating a 90% likelihood of a 25-basis-point increase in the forthcoming decision, per Reuters.

Diogo Guillen, the bank's economic policy director, emphasized last week that policymakers had observed more robust economic growth since their most recent meeting. The exchange rate was "a bit higher," and inflation expectations remained broadly unchanged but de-anchored, which is a cause for concern.

According to the weekly survey, respondents increased this year's gross domestic product forecasts to 2.68% from 2.46% in the previous week.