Brazil Striving to Pull Economy Out of Recession
Brazil’s central bank will likely step up its pace of interest rate cuts on Wednesday as policymakers scramble to rescue the country’s once-vibrant economy from the worst recession on record as it threatens to stretch into a third year.
Fifty out of 54 analysts polled by Reuters expect the central bank to cut the benchmark Selic rate by 50 basis points to 13.25% after two straight cuts of 25 basis points. Three economists surveyed expect a more aggressive cut of 75 basis points while one is betting on a 25-basis-point decrease.
A sharp slowdown in inflation, which earlier in 2016 had reached double-digits, is expected to give ammunition to the banks’ nine-member monetary policy committee to comply with the demands of politicians and the business sector for heftier rate cuts.
The record recession has left millions of Brazilians unemployed and hundreds of companies bankrupt, stoking pressure on central bank chief Ilan Goldfajn to lower interest rates, which rank among the world’s highest.
“The weak economy supports a 50-basis-point cut, but caution argues against a more aggressive 75-basis-point cut,” economists with Brown Brothers Harriman wrote in a research note.
Economic figures due on Wednesday are likely to show consumer prices rose 6.34% in 2016, at the high end of the central bank’s target range of 2.5% to 6.5%, according to the median of 25 estimates in another Reuters poll of economists.
The central bank’s own projections show 2017 inflation dipping below the 4.5% midpoint of the target while the economy remains lackluster with an expansion of 0.8%.
The recession and approval of legislation to limit public spending for up to 20 years have paved the way for a more aggressive rate-cutting cycle, which members of President Michel Temer’s administration see as crucial for the economy to rebound.
Analysts say Temer will probably rely on interest rate cuts to breathe new life into the economy as growing political turbulence and depleted state coffers limit his ability to provide fiscal stimulus.
Many economists said the central bank could further accelerate the pace of cuts later this year if Congress moves ahead with a reform to cut pension benefits, which represent nearly half of Brazil’s expenditures before debt- servicing costs.
The median Reuters poll forecast for the Selic rate at the end of 2017 stood at 10% in the poll, with estimates varying between 9% and 11.25%.