Bank of America expects the Brazilian real to strengthen, supported by commodities and interest rate differentials.

Investing.com – US Bank forecasts that supported by high commodity prices, wide interest rate spreads, and an improving political environment, the Brazilian real against the US dollar will rise to 5.25 by the end of 2026 and maintain that level in 2027.

The bank expects Brazil’s economy to grow 2% in 2026 and 1.8% in 2027, with the 2026 forecast 20 basis points above market consensus and the 2027 forecast in line with market consensus. Inflation is expected to be 4% in 2026, in line with market consensus, and 3.5% in 2027, 30 basis points below market consensus.

US Bank predicts that Brazil’s policy interest rate will reach 11.75% by the end of 2026 and fall to 10.5% by the end of 2027. The 2027 forecast is 325 basis points below the implied market rate of 13.75%.

As a net oil exporter, Brazil has favorable macro conditions under the current geopolitical environment. The country benefits from stronger trade conditions, larger oil trade surpluses, and higher fiscal revenues. However, structural dependence on fuel imports may exert inflationary pressure.

The Central Bank of Brazil has begun a easing cycle with a 25 basis point rate cut. The bank acknowledges that ongoing conflicts increase uncertainty but has not adjusted inflation risk balance to an upward bias. US Bank expects that, barring worsening external risks, the Central Bank will continue to cut rates by 50 basis points at upcoming meetings, reaching 11.75% by the end of 2026.

February’s month-on-month inflation rate was 0.70%, up from 0.33% in January, mainly driven by seasonal factors. Year-on-year inflation fell to 3.81%, the first time below 4% since May 2024. The underlying inflation dynamics remain moderate, further supporting the case for monetary easing.

GDP growth is projected at 2.3% in 2025, supported by external sectors in the fourth quarter. High-frequency indicators are improving but show localized strength rather than a broad acceleration. US Bank expects that due to the lagged effects of monetary policy, economic activity will slow in 2026.

According to US Bank’s medium-term Compass BEER model, the real is undervalued by 5.3%. The long-term Compass FX model indicates the currency is overvalued by 1.8%.

Risks to the outlook include fiscal and policy noise and election volatility. Upcoming risk events include the Central Bank of Brazil meetings on April 29 and June 17, and the presidential election on October 4.

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