Renewable Energy

POLL-Brazil to hold rates at record low as pressure to cut builds

Credit: REUTERS/UESLEI MARCELINO

Brazil's central bank will leave its benchmark interest rate on hold this week, according to a Reuters poll of economists, but increasingly weak economic growth and inflationary pressures suggest it may not be long before it eases policy.

By Jamie McGeever

BRASILIA, June 17 (Reuters) - Brazil's central bank will leave its benchmark interest rate on hold this week, according to a Reuters poll of economists, but increasingly weak economic growth and inflationary pressures suggest it may not be long before it eases policy.

The central bank's Selic rate has been at a record low 6.50% for over a year, and 18 of the 19 economists polled by Reuters said it will still be there after the bank's policymaking committee, known as "Copom," meets on June 18-19.

One economist forecast a rate cut.

The downward bias is building rapidly. Brazil's economy is stagnating and may even be in recession, the global outlook is deteriorating and there are signs that inflation is drifting back toward the central bank's 4.25% target.

Of the 19 economists polled, thirteen said the skew for rates over the next year is downward, five said neutral and only one said it is to the upside.

That is far more dovish than the previous poll in May, when five out of 15 economists said the bias was to the downside, nine were neutral, and one said to the upside.

"The weakness of the Brazilian economy and rapidly falling inflation mean we now expect an interest rate cut, and we think there is a window of opportunity for Copom to act at (this) meeting," Edward Glossop, Latin America economist at Capital Economics, wrote in a client note.

"All told, Wednesday's Copom meeting will be a close call but, on balance, we think a 25bp cut (to 6.25%) is more likely than not," he said.

Glossop's forecast is the most aggressive in the poll but reflects the general view on the economy and the path for rates. Several economists expect Copom to insert more dovish language in its policy statement, paving the way for an eventual cut.

Much of Copom's debate is likely to center on how serious policymakers think the current economic slowdown is and how confident they are that inflation has topped out.

The economy shrank in the January-March period, its first contraction since 2016. April and May indicators so far offered little sign that things have turned around much, if at all, suggesting the economy could technically be in recession.

The central bank's latest IBC-Br economic activity index may have tipped the balance for some Copom members. It showed that economic activity fell again in April - the longest stretch of declining activity since the last recession.

Brazil's economy is expected to grow by less than 1.0% this year, according to a central bank survey released Monday, as economists cut their forecasts for the 16th week in a row to new lows and dramatically slashed their interest rate outlook.

Financial markets have aggressively scaled back their interest rate views. On Thursday, 2020 rates futures contracts fell below 6.0% for the first time, suggesting the Selic rate will be 50 basis points lower in around 12 months.

Even if it skirts recession, the economy is underperforming. Uncertainty surrounding pension reform, the government's 1.237 trillion reais ($319 billion) proposal to balance Brazil's books and revive growth, is not helping either.

Annual inflation fell to 4.66% in May from 4.92% in April, the first decline this year, providing some relief after four months of increases.

(Reporting by Jamie McGeever and Gabriel Burin in Buenos Aires; Editing by Jeffrey Benkoe)

((jamie.mcgeever@thomsonreuters.com; +55 (0)61 3426 7015; Reuters Messaging: jamie.mcgeever.reuters.com@reuters.net))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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