(Adds Reuters poll on Selic expectations in third graph)
By Alonso Soto and Silvio Cascione
BRASILIA, Jan 19 (Reuters) - The Brazilian central bank on Tuesday signaled that a worsening recession could force it to abandon plans to aggressively raise interest rates to battle inflation at a 12-year high.
In an unusual statement, hours before the start of a two-day monetary policy meeting, central bank chief Alexandre Tombini said policymakers will take into consideration “significant” cuts in Brazil’s growth outlook in their decision.
His comments considerably lowered market expectations for the bank to hike rates by 50 basis points, according a Reuters poll of economists on Tuesday.
Twenty-four out of 43 economists predict a 50-basis-point hike while the rest expects either a smaller increase or no rate hike at all. In a Reuters poll last week, 48 out of 59 economists expected a 50-point increase.
As Brazil suffers through its worst recession in more than a century Tombini is under tremendous pressure to keep rates steady to avoid further harm to an economy that has shed 1.5 million jobs in the past year.
President Dilma Rousseff’s Workers’ Party and powerful business and labor groups have called on the bank to keep the benchmark interbank rate at 14.25 percent, the highest among major economies, even though the bank has signaled that high inflation will require higher rates.
Dozens of union workers waving flags protested on Tuesday morning outside the central bank’s regional office in Sao Paulo.
Rousseff’s administration is worried more rate hikes will hamper plans to revive the economy, pointing to rising tensions with the central bank that has sought to curb an inflation rate hovering near 11 percent.
“Not raising the Selic now will be interpreted as weakness by the central bank,” said Andre Perfeito, chief economist with Gradual Investimentos, who expected a 50-basis-point rate increase.
Tombini’s surprise comments prompted many economists to change their forecasts to a 25-basis-points rate hike from a previous 50 basis points. Others also see a chance the bank will keep rates steady.
“Anything could happen now,” said Jankiel Santos, chief economist with Sao Paulo-based bank Haitong. “This adds more uncertainty to the meeting that concludes tomorrow.”
Brazil’s interest rate futures <0#2DIJ:> fell sharply after Tombini’s statement, showing that traders see a greater chance the bank will keep rates on hold or raise them by a smaller 25 basis points. Rate futures point to a 77 percent chance that the bank will opt for a more moderate rate increase, according to Thomson Reuters data.
Tombini said it was “significant” that the International Monetary Fund cut Brazil’s growth outlook to a negative 3.5 percent in 2016 and zero growth in 2017. The IMF expectations were slightly worse than those in a weekly central bank survey of private economists’ estimates and than the median forecasts in a Reuters poll.
Fitch Rating, which stripped Brazil of its investment grade rating in December, on Tuesday said the country’s recession could be deeper than expected and it will only return to growth once political uncertainties subside.
The recession has kept Rousseff’s popularity near record lows as the leftist leader battles impeachment proceedings in Congress for allegedly doctoring fiscal accounts last year. (Additional reporting by Silvio Cascione in Brasilia and Bruno Federowski and Reese Ewing in Sao Paulo; Editing by Chizu Nomiyama, Meredith Mazzilli and Andrew Hay)