Bank of America said on Thursday that Brazil's market-implied inflation premium has contracted from recent levels but remains elevated. The bank's weekly inflation risk analysis found the difference between market-implied one-year breakeven inflation and survey-based expectations shrank to 1.28 percentage points from 1.60 percentage points.
According to the report, one-year breakeven inflation fell to 5.39% from 5.65% over the past week. In contrast, the median reading from the Focus survey for inflation 12 months ahead inched up to 4.11% from 4.05%. That divergence implies markets still price an appreciable upside risk relative to surveyed expectations.
Bank of America identified three developments this week that may exert upward pressure on inflation expectations. First, forecasts for El Niño worsened, which the bank said introduces medium-term risks to food inflation and carries potential effects that could extend into 2027. Second, the Focus survey cutoff occurred on Friday and will take place again this Friday, a timing issue the bank flagged as able to influence reported expectations as new administered-price decisions arrive. Third, Brazil's electricity regulator Aneel approved tariff increases in several states, which Bank of America said adds to energy-related price pressures facing the economy over the next 12 months.
Using the latest Focus survey inputs within the Central Bank of Brazil's inflation framework, Bank of America estimated inflation in the monetary policy-relevant horizon at 3.5%, an increase from 3.3% at the time of the last Copom meeting. The bank noted this upward shift in the projected policy-horizon inflation occurred despite a stronger Brazilian real, quoted at R$5.05 per dollar in its analysis.
Overall, Bank of America concluded that the remaining spread between market pricing and survey expectations reflects a market-priced upside inflation risk premium. The bank's commentary underscores that, while the premium has narrowed, meaningful inflation risks tied to weather and administered-price moves persist in shaping expectations for the coming year.
- Focus: Weekly Bank of America inflation risk report on Brazil.
- Core data: One-year breakeven inflation 5.39% (from 5.65%); Focus median 12-month projection 4.11% (from 4.05%); gap 1.28 percentage points (from 1.60).
- Monetary-horizon projection: Bank of America estimate 3.5% (up from 3.3% at last Copom meeting); currency at R$5.05 per dollar.