July 20, 2016 / 5:01 AM / 2 years ago

Brazil new central bank set to keep rates steady despite recession

BRASILIA, July 20 (Reuters) - Brazil’s central bank will likely leave interest rates unchanged on Wednesday, in the first decision by a new board expected to exercise caution in the face of political uncertainty and high inflation expectations.

All but one of 43 economists polled expect the bank to hold its benchmark Selic rate at 14.25 percent for the eighth consecutive time. One expects a 50 basis-point cut.

Even with a recession well into its second year, new central bank governor Ilan Goldfajn has vowed to maintain rates at near 10-year highs to curb inflation expectations in a country scarred by bouts of hyperinflation just over two decades ago.

Goldfajn and the four new members of the nine-seat board have tied future rate cuts to the approval by a divided Congress of measures to cap public spending and reduce pension benefits.

“Continued high inflation expectations combined with a complex political environment - with some uncertainty regarding the passage of economic reforms, mainly those related to fiscal policies - remain barriers to monetary flexibility,” Sao Paulo-based broker Brasil Plural said in a research note.

The tough inflation-fighting stance of Goldfajn, who quit as Itau Unibanco chief economist to lead the central bank in June, has prompted economists to push back their expectations for an initial rate cut to October.

Some forecast the Selic could drop only in November if inflation expectations remain high.

Interim President Michel Temer, who has replaced leftist President Dilma Rousseff while she stands trial for allegations that she broke fiscal rules, is working to build Congressional support for unpopular economic reforms he says are needed to regain investors’ trust.

Inflation will most likely end the year above the official target range of between 2.5 and 6.5 percent, but Goldfajn has promised to do whatever is necessary to reduce it to the centre of the target in 2017.

The bank has failed to hit the 4.5 percent center of the inflation target since 2010.

With the recession pressuring consumer demand and a stronger real easing the value of imports, inflation has fallen from double digits, but the bank says that more needs to be done before it can cut borrowing costs.

Annual inflation probably dropped slightly in mid-July but remained close to 9 percent as high food prices continued to offset a drop in items such as healthcare and clothing. (Reporting by Alonso Soto; Editing by David Gregorio)

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