UPDATE 1-Brazil set to slow pace of interest rate hikes as economy flags

miércoles 26 de febrero de 2014 09:33 GYT
 

(Adds analyst comment and market expectations)
    By Alonso Soto
    BRASILIA, Feb 26 (Reuters) - Brazil will likely raise
interest rates for the eighth straight time on Wednesday but
slow the pace of monetary tightening as inflation eases and
Latin America's largest economy flirts with recession. 
    Brazilian President Dilma Rousseff's efforts to tighten
fiscal policy could also give the central bank some breathing
room to opt for a smaller rate hike, following a string of
aggressive increases that lifted the benchmark lending rate by
325 basis points in less than a year.
    Thirty-four of 47 economists polled by Reuters last week
expect the bank to raise the so-called Selic rate 
by 25 basis points to 10.75 percent. The rest bet policymakers
will vote for the seventh straight increase of 50 basis points.
 
    A smaller rate hike would be a relief to Rousseff, who has
watched Brazil's economy slow to a crawl since taking office in
January 2011. With a presidential election looming in October,
Rousseff is eager to get the economy back on track as she gears
up for the campaign. 
    Brazil nearly slipped into a recession in the second half of
2013, according to economists polled by Reuters last week.
Official data set for release on Thursday is expected to show
the economy expanded by a meager 0.3 percent in the fourth
quarter from the previous quarter, according to the poll.
    The central bank has signaled that the tightening cycle is
coming to an end. The bank's president, Alexandre Tombini, said
last week that past rate hikes have helped slow inflation, a
comment that many interpreted as a sign that an increase on
Wednesday could be one of the last. 
    Annual inflation eased to 5.59 percent in January, its
lowest level in more than a year, but still remains at the upper
end of the official target range of 2.5 percent to 6.5 percent.
A possible increase in energy rates due to a severe drought and
naggingly high services prices will keep inflation under
pressure this year, analysts say. 
    The stability of the Brazilian real despite the
recent sell-off in emerging market assets is another reason the
bank may opt to bring the tightening cycle to an end soon. 
    The central bank has said a weaker real dilutes some of the
effects monetary policy has over inflation. A weaker real
increases the value of imported goods, which Brazilians continue
to snap up at a rapid pace.  
    "The pledged fiscal efforts, and more particularly, the
worsening economic outlook in coming quarters will prompt the
central bank to opt for a smaller rate hike today," economists
with Brazilian bank Bradesco said in a note on Wednesday.
    The probability of a 25-basis-point rate hike implied in the
rate futures curve stood at 66 percent on Wednesday morning,
according to Thomson Reuters data.  
    
    FISCAL RELIEF
    Last week, the Rousseff administration pledged to freeze 44
billion reais ($18.8 billion) in spending to meet a more
"realistic" fiscal savings goal this year. The government has
promised more fiscal austerity in a bid to regain investors'
trust after missing the target in the last two years.  
    If the government follows through on its promises to limit
spending it could help the central bank control inflation by
removing incentives for consumption.
    Senior government officials have acknowledged that monetary
policy's impact over economic activity has waned in recent
years, meaning the bank can keep hiking rates without hurting
the economy too much. 
    "The effects of monetary policy are not as strong as
before," said one official on condition of anonymity, adding
that a recovery in developed nations should help Brazil grow
more than the 1.7 percent that many economists expect this year.
    The official said a drop in loan delinquencies has kept the
interest rates charged by banks from rising in tandem with the
Selic, cushioning the impact for consumers. A likely increase in
credit disbursements this year will further reduce the impact of
monetary policy on economic growth, the official added.
 ($1 = 2.34 reais)

 (Editing by Todd Benson, Matthew Lewis and Sofina Mirza-Reid)