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BofA Predicts January Rate Cut Despite Hawkish Central Bank Tone, Citing Economic Conditions

Bank of America’s Economic Outlook on Brazil’s Monetary Policy

David Beker, head of Brazil economics and Latin America strategy at Bank of America (BofA), believes the Central Bank’s Monetary Policy Committee (Copom) does not need to soften its language regarding interest rates. Despite the Copom’s decision to maintain the benchmark Selic rate at 15% and its cautious tone, Beker maintains BofA’s projection for a rate cut in January.

The Copom’s recent statement emphasized the need for “caution” amidst “elevated uncertainty.” This stance was interpreted by some market participants as a “cold shower,” as they had anticipated a more dovish communication. However, Beker suggests that the Central Bank might benefit from maintaining a “hawkish” (firm) posture until the last moment to maximize the impact of its restrictive monetary policy.

Beker acknowledges that while he expected a softer tone from the Copom, the current communication does increase uncertainty about a potential reduction in early 2025. Nevertheless, he points to aggregate economic conditions as supportive of a rate cut, noting that the Selic rate, even after a reduction, would remain above neutral levels.

BofA’s Selic Rate Projections for 2025

Bank of America forecasts that the Copom will initiate interest rate cuts in January with a 0.50 basis point reduction. The bank projects the Selic rate to end 2025 at 11.25%, a level below the market’s median expectation of 12%, but still above the estimated neutral interest rate. Beker stated, “I am sticking with the call for January. Am I less comfortable? Yes, but I haven’t changed it yet.”

The Copom’s communication highlighted several risks to inflation, including unanchored expectations, the persistence of service inflation, and the interplay of domestic and external economic policies. Beker believes the Central Bank can still acknowledge improvements in the economic scenario and the effectiveness of its past actions, justifying a rate cut in January.

Central Bank Directors and Policy Consistency

The impending departure of two Central Bank directors, who are part of the Copom, at the end of December has also been a point of discussion. While some in the market speculated this might be a reason for the Copom’s reserved communication, Beker dismisses this, arguing that new directors are expected to be technical and uphold the current monetary policy direction.

Beker emphasizes that **consistency between fiscal, credit, and monetary policies** is paramount for reducing and sustaining lower interest rates. He suggests that if the Central Bank were to signal an easing prematurely, the market would price it in, diminishing the policy’s intended impact. Therefore, maintaining a firm stance, for now, could be a strategic move by the monetary authority.

The current economic environment, according to BofA’s analysis, supports the initiation of a monetary easing cycle. The bank’s projections indicate that even with a rate cut, the Selic rate will continue to exert a restrictive influence on the economy, helping to guide inflation toward the target. This approach aims to balance the need for economic stimulus with the imperative of price stability.