Brazil likely to hike rates as inflation risks rise on weak real

miércoles 29 de julio de 2015 01:00 GYT

BRASILIA, July 29 (Reuters) - Brazil's central bank is widely expected to raise its policy interest rate on Wednesday after a steep cut in fiscal savings targets weakened the real currency and stirred doubts about the government's commitment to help contain price increases.

The Brazilian real has slid more than 4 percent against the U.S. dollar to its weakest in 12-years since the less ambitious targets were unveiled a week ago. The sharp depreciation has intensified inflationary pressures by making imports more expensive.

Forty-two out of 55 analysts surveyed by Reuters last week expect the central bank to raise its benchmark Selic rate by 50 basis-point for the sixth straight time to 14.25 percent. The remainder forecast a smaller increase, of 25 basis points, to 14 percent.

Standard & Poor's threat on Tuesday to strip Brazil of its coveted investment-grade rating in the coming year is also expected to raise pressure on the bank to keep raising rates, already the highest among major world economies.

In recent weeks the bank signalled it was close to ending the rate-hiking cycle that started in October, pointing to its success in bringing down inflationary expectations from 2017 onward.

However, the reduction of the government's key fiscal targets for this and the next two years prompted an immediate change in the tone used by the central bank as it warned of more vigilance.

"We expect a 50-basis-points hike and the downgrade threat reaffirms that position," said Natalia Cotarelli, economist with Banco ABC Brasil in Sao Paulo. "The trigger for that change in tone of the central bank was the reduction of the fiscal goals."

Many market observers interpreted the target cuts announced last Wednesday as a signal that government will not reduce spending as aggressively as planned, effectively an admission it would not be able to help the central bank rein in inflationary pressures.

Two days after the government announced the lower targets for fiscal savings, central bank director Luiz Pereira said the bank should remain vigilant if it is to cut inflation in half to meet its official target next year.

He stressed that "new risks" have emerged that threatened the bank's goal of bringing inflation back to the 4.5 percent center of the official target in 2016.

Brazil's inflation slowed in the month to mid-July as the economy contracts, but remained high on an annual basis at 9.25 percent. (Reporting by Alonso Soto; Editing by Simon Cameron-Moore)