May 11, 2018 / 1:22 PM / 6 months ago

POLL-FX selloff will not derail Brazil's planned rate cut next week

* reuters://realtime/verb=Open/url=cpurl://apps.cp./Apps/cb-polls?RIC=BRCBMP%3DECI poll data

By Bruno Federowski

BRASILIA, May 11 (Reuters) - A sell-off in the Brazilian real will not prevent the central bank from cutting interest rates once again next week as a surprisingly slow economic recovery keeps a lid on inflation, a Reuters survey of economists showed on Friday.

This should allow the bank to keep rates at a record low throughout 2018, according to the survey, as it struggles to lift inflation back to its target range.

Forty of 42 economists polled by Reuters expect the bank to trim the benchmark Selic interest rate by 25 basis points to an all-time low of 6.25 percent at the end of a two-day meeting on May 16. Two expect it to stand pat.

The near consensus highlights how stubbornly low inflation has repeatedly frustrated the bank’s plans to halt policy easing since signaling its intention to do so in February.

It is also a marked change from the previous poll, taken before the bank’s last meeting in March. Most respondents then expected rates to hold at 6.50 percent for a long time, though some acknowledged the bank would keep its options open.

The dovish swing follows a string of underwhelming economic indicators covering everything from economic activity and retail sales to industrial output and the services sector, which suggest Brazil’s recovery from the deepest recession in decades hit a bump this year.

This has helped to keep inflation far below this year’s official target range of 4.5 percent, plus or minus 1.5 percentage points, even as the Brazilian real plummeted to multi-year lows.

With the midpoint of this year’s target still elusive, the central bank is likely to turn its focus to the lower 2019 goal, of 4.25 percent, Banco MUFG Brasil economist Mauricio Nakahodo said.

A weaker currency, a consequence of growing bets on higher U.S. interest rates due to a wider fiscal deficit and faster inflation, could generate inflationary pressures by boosting import prices, but the slow economy should limit any pass-through, analysts said.

This should drive the central bank to wait until at least 2019 before hiking rates, said all of 32 economists who replied to an extra question. Two, in fact, expect it to tighten policy only in 2020, when the economy finally heats up.

The results underscore a growing conviction that rates will remain low for longer in Latin America’s largest economy. In the previous poll, three of 35 economists had predicted that the bank would hike rates in 2018 still.

The recent stretch of weak economic indicators drove JPMorgan economists to push back their forecast for an interest rate hike to the end of the second quarter of 2019, compared to January previously. (Reporting by Bruno Federowski Editing by Nick Zieminski)

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