March 18, 2019 / 5:52 PM / 4 months ago

Brazil central bank to keep rates on hold in new chief's debut: Reuters poll

BRASILIA (Reuters) - Brazil’s central bank will keep its main interest rate on hold at 6.50 percent this week, almost exactly a year after it was cut to that record low, with signs pointing to it staying there for most of 2019, according to a Reuters poll of 21 economists.

FILE PHOTO: People walk outside the central bank headquarters building in Brasilia, Brazil, September 6, 2017. REUTERS/Ueslei Marcelino

This week’s meeting of the central bank’s policy-setting committee (Copom) will be the first presided over by new central bank chief Roberto Campos Neto, who succeeded Ilan Goldfajn on Feb. 26.

The U.S.-trained economist, former banker and market trader has pledged to adhere to the policy framework used to guide rate decisions under his predecessor, one characterized by “caution, serenity and perseverance”.

All 21 economists in the Reuters poll agree that the benchmark Selic rate will be kept on hold at 6.50 percent for several months, but are far more divided on where rates will be a year from now.

Of the 18 who gave a general 12-month outlook, seven said the bias for interest rates was neutral, seven said to the upside, and four said to the downside.

The focus on Wednesday will center on whether policymakers still think risks to inflation are “asymmetric” to the upside.

While 12-month inflation of 3.89 percent remains below the central bank’s 4.25 percent target for this year, recent readings have surprised on the upside. With Brazil’s exchange rate weakening since the last policy meeting, imports may continue to push prices higher.

Economists also reckon relatively swift congressional approval of a controversial pension reform would help revive the economy, which could pave the way for the central bank to start “normalizing” policy.

Jumpstarting the economy remains a tall task. Recovery from the 2015-16 recession has been weak, growth nearly ground to a standstill late last year, activity this year has been sluggish, and economists are downgrading their 2019 forecasts en masse.

“The most recent data point to downside risks to Brazilian growth, particularly in Q1, while inflation remains in check,” JP Morgan economists wrote in a client note.

“However, lingering policy uncertainty regarding government reforms and the global growth backdrop likely will preclude any easing in monetary policy. Also, the Brazilian real depreciated a bit since the last meeting,” they said.

President Jair Bolsonaro’s pension reform proposal aims to slash social security spending and generate savings of 1.2 trillion reais ($315 billion) over the next decade.

Campos Neto shares the consensus view among analysts that pension reform approval is critical to reviving growth and boosting investor sentiment toward Brazil. However, the bill will likely be watered down and may not be approved for months.

For their part, traders think Copom’s next move will be a cut. Futures markets indicate a 50-50 probability the Selic rate will be cut by January 2020 and trading volume last week was the heaviest since November, suggesting growing conviction behind the trade.

Reporting by Jamie McGeever; editing by Diane Craft

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