Brazil real hits four-month high as global banks turn hawkish on interest rates

© Reuters. FILE PHOTO: Brazilian Real and U.S. dollar notes are pictured at a currency exchange office in Rio de Janeiro, Brazil, in this September 10, 2015 photo illustration. REUTERS/Ricardo Moraes

By Jamie McGeever

BRASILIA (Reuters) - Brazil's real surged on Thursday to close at its highest in almost four months against the dollar, a day after the central bank struck a hawkish tone in its statement that accompanied a second aggressive hike in borrowing costs.

A clutch of major global banks published notes revising their outlook on Brazil's benchmark Selic rate, which they say is now likely to rise more quickly or more aggressively.

The real rose around 1.5% on Thursday to 5.2776 per dollar, its strongest close since Jan. 14. Having traded as weak as 5.87 in March, the real is now down only 1.6% year-to-date.

Morgan Stanley (NYSE:MS) and BNP Paribas (OTC:BNPQY) raised their 2021 year-end calls outright. Citi, Bank of America (NYSE:BAC) and Rabobank kept their forecasts but now anticipate a faster pace of tightening. Barclays (LON:BARC) said it could revise its outlook next week.

The 75-basis-point rise in the Selic rate to 3.50% was flagged by policymakers and predicted by all 29 economists in a Reuters poll.

The tone of the accompanying statement was hawkish, notably that there was no firm commitment to a 'partial normalization' process and future moves "could be adjusted to assure the achievement of the inflation target."

"We now think the (central bank) will have to go for a full normalization and hike rates to 6.5% in 2021 versus our earlier forecast of 5.0%," BNP Paribas economist Gustavo Arruda and his team wrote in a note on Thursday.

"Taking into account the more challenging inflation environment, we now expect two hikes of 75bp in June and August and three hikes of 50bp in September, October and December," they said.

Economists at Morgan Stanley raised their 2021 Selic forecast to 5.50% from 5.00% and the 2022 forecast to 6.50% from 6.00%.

Mauricio Une at Rabobank maintained his forecast for a further 200 basis points of tightening this year, but now expects that to be delivered over three policy meetings instead of four.

Citi's Leonardo Porto said he will wait for more hard economic data and the policy meeting minutes for a clearer idea on how long Copom will stick with its 'partial normalization process', but "we recognize the increasing risks of a higher interest rate."