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Brazil Poised to End Interest Rate Hikes

Brazil Poised to End Interest Rate HikesBrazil Poised to End Interest Rate Hikes

 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%, the highest among the world’s 10 biggest economies.

After raising rates by a staggering 325 basis points in 9 months, the central bank’s monetary policy committee, known as Copom, 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 more than 28% so far this year 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.

“Standing between a rock and a hard place, it will be vital for the Copom to communicate to market observers regarding the monetary policy strategy,” economists with Barclays said in a research note on Wednesday. “We stand by our view that the Copom is done with the hiking cycle.”

The probability of the bank keeping rates unchanged is as high as 83%, yields on interest rate futures suggest.

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% in the month to mid-August, more than double the official target center of 4.5%.

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.

Financialtribune.com