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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 that 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.
"We believe that an improvement in the inflation readings and growing frustration caused by the weak performance of the economy will have more weight in this monetary policy decision," economists at Santander wrote in a note last week, forecasting a 25 bps rate hike on Wednesday.
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 and Matthew Lewis)