(Adds analyst comment)
By Alonso Soto
BRASILIA, July 29 (Reuters) - Brazil’s central bank was poised to maintain its aggressive pace of interest rate hikes 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.
Forty-two out of 55 analysts surveyed by Reuters last week expect the central bank to raise its benchmark Selic rate by 50 basis points for the sixth straight time to 14.25 percent. The remainder forecast a hike of 25 basis points.
The Brazilian real has slid nearly 4 percent against the U.S. dollar to its weakest in 12 years since Brazil unveiled less ambitious fiscal targets last Wednesday. The sharp depreciation has intensified inflationary pressures by making imports more expensive. The real firmed 0.2 percent early on Wednesday.
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.
Until recently the bank signaled 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 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.”
Still, Siobhan Morden of Jefferies LLC said in a research note the central bank will likely signal the end of the cycle in its decision statement to avoid deepening a recession that complicates the recovery of fiscal accounts by slowing revenues.
Many market observers interpreted the new fiscal targets 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 it was “paramount” for the bank to remain vigilant to bring 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 contracted, but remained high on an annual basis at 9.25 percent. (Reporting by Alonso Soto; Editing by Simon Cameron-Moore and Meredith Mazzilli)