POLL-Brazil rates to hit new low, but dovish outlook less certain
By Jamie McGeever
BRASILIA, Sept 13 (Reuters) - Brazil's central bank is expected to cut its benchmark interest rate to a new low on Wednesday, according to a Reuters poll of economists, as it tries to boost a lackluster economic recovery and prevent inflation from falling too far below target.
While all but one of the 30 economists surveyed expect the second cut of an easing cycle started in July, the consensus view that rates will continue falling over the coming year is no longer as overwhelming as it was a couple of months ago.
The median forecast in a poll of 30 economists was for a 50-basis-point cut lowering the benchmark 'Selic' rate to 5.50%, against a backdrop of weak domestic growth and inflation, a U.S.-China trade war, and a darkening global economic outlook.
All but two of the 30 surveyed expected a 50 bp move; one predicted a less aggressive cut to 5.75% and one reckons the central bank will stand pat.
Of the 27 economists who gave a view on the skew for rates over the next year, 22 said it is downward, three said it was neutral, and two said it was higher. Responding to the same question in July, 20 out of 21 economists who gave a view said the skew for rates was downward and one said it was neutral.
"We believe the central bank will cut 50 bp at the next meeting given the benign inflation trajectory and contained expectations," wrote Cassiana Fernandez, Brazil economist at JP Morgan, in a recent note.
"Beyond that, the outlook remains uncertain; we assume the easing cycle will end in September, but a final 25 bp cut in October remains possible."
The bank's rate-setting committee known as 'Copom' announces its decision on Wednesday Sept. 18 at the conclusion of a two-day meeting.
FX FLY IN THE OINTMENT
Since Copom cut rates at the end of July, central bank president Roberto Campos Neto has said several times that low inflation and a "benign" outlook provide room for further policy "adjustment," central bank-speak for more easing.
The government this week lowered its 2019 annual inflation forecast to 3.6% from 3.8%, putting it further below the central bank's official target, which remains 4.25% but looking unlikely to be achieved.
Annual inflation in August was 3.4%.
The government also raised its 2019 economic growth forecast to 0.85%, but that is still well below the 1.1% pace in each of the previous two years and more proof that the economy has failed to rebound meaningfully from the 2015-16 recession.
The economy grew by 0.4% in the second quarter, twice as fast as expected and putting to bed fears that a dip back into recession was on the cards. The latest data suggests the third quarter got off to a solid, but not spectacular start.
The government's economic reform agenda is also providing cover for the central bank to ease monetary policy, analysts say, even though progress on that front is uneven. Pension reform will soon be signed into law, but tax reform could be pushed back well into next year.
While most economists expect the Selic rate to fall further this year, next year's outlook is less clear, in large part down to the exchange rate's steep decline since Copom last met.
The real BRBY weakened 8% against the dollar in August, its biggest monthly decline since 2015, pulling it within sight of its record low around 4.25 per dollar.
If anything prevents the central bank from cutting rates more aggressively, economists say, it will be the threat of further weakness in the currency that could stoke financial market volatility and eventually inflation.
($1 = 4.06 reais)
(Reporting by Jamie McGeever; Additional reporting by Gabriel Burin in Buenos Aires; Editing by Andrea Ricci)
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