BRASILIA, Sept 2 (Reuters) - Brazil is likely to halt one of the world’s most aggressive rate-hiking cycles on Wednesday, sparing more suffering to a contracting economy despite fears a deepening fiscal crisis could keep inflation high.
All but one of the 30 economists surveyed by Reuters last week expected the central bank to hold its benchmark Selic rate at 14.25 percent, the highest among the world’s 10 biggest economies.
After raising rates by a staggering 325 basis points in 9 months, the central bank has signaled an end to the monetary tightening as markets see inflation easing in coming years.
Fears that more rate hikes could wreck an economy heading into its worst recession in 25 years are also weighing on policymakers. The downturn, in fact, is helping ease inflation as consumption falls.
Still, President Dilma Rousseff’s inability to plug a widening fiscal deficit that threatens Brazil’s investment-grade rating is raising pressure on the central bank.
High government spending combined with a sharp depreciation of the real due to fears of a weaker Chinese economy could fuel inflation already hovering near 12-year highs. The real has slid about 30 percent since the bank’s last meeting to its weakest in nearly 13 years.
Sao-Paulo based Banco Fator calculates that at current levels the weaker real is likely to push up inflation by about 0.2 to 0.5 of a percentage point.
“Torn between these conflicting influences, the (bank)committee is likely to leave the base rate unchanged at 14.25 percent,” economists with Brasil Plural said in a research note. “Perhaps reinforcing the message that this will contribute to ensure convergence of inflation to the target.”
To keep inflation expectations in check the bank has warned that it will act decisively to prevent consumer price growth from deviating significantly from the government’s target.
Despite the slowdown, annual inflation climbed to 9.57 percent in the month to mid-August, more than double the official target center of 4.5 percent.
A sharp increase in government-regulated prices such as electricity has continued to fuel inflation, but many economists believe price increases may have peaked last month. (Reporting by Alonso Sotol; Editing by Andrew Hay)