Wires

BAML cuts Brazil rate forecast to 4.00%, raises GDP growth outlook

BRASILIA, Oct 29 (Reuters) - Brazil's central bank will cut its benchmark Selic interest rate to 4.00% next year, economists at Bank of America Merrill Lynch said on Tuesday, lowering their forecast from 4.75% but also raising their growth outlook for the region's largest economy.

BAML economists now expect Brazil's gross domestic product to grow by 1.0% this year and 2.4% next year, up from their previous predictions of 0.7% and 1.9%, respectively.

While growth may be starting to pick up again, inflation is not.

"Given the ongoing low inflation backdrop, anchored expectations and a wide output gap, we cut our Selic forecast once again. We now expect 3 more cuts of 50bp (basis points), bringing the Selic to 4.50% this year and 4.0% next year," David Becker and Ana Madeira wrote in a note on Tuesday.

The central bank is expected to lower the Selic rate by half a percentage point on Wednesday for the third consecutive time to a new all-time low of 5.00%, according to a Reuters poll of economists.

The central bank's latest weekly 'FOCUS' survey of around 100 financial institutions on Monday showed the median Selic forecast for the end of next year fell to 4.50% from 4.75%.

Becker and Madeira said the worst appears to be over for the economy and the outlook is improving, thanks to lower rates, progress on the government's economic reforms, job growth and a short-term boost from the freeing up of cash from workers' 'FGTS' severance fund. (Reporting by Jamie McGeever; Editing by Richard Chang)