October 29, 2018 / 5:35 PM / 14 days ago

Brazil to wait longer before hiking rates after far-right victory: Reuters poll

BRASILIA (Reuters) - Brazil will likely hold interest rates at an all-time low this week and wait longer to raise them as far-right lawmaker Jair Bolsonaro’s victory in the presidential election stems a currency selloff, a Reuters poll showed.

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

The central bank will probably keep the benchmark Selic interest rate at 6.50 percent on Wednesday after a two-day meeting, said 40 of 42 economists. The two dissenters, Capital Economics and HSBC, expected a 25 basis-point hike.

The poll result falls in line with previous surveys, which showed the central bank was likely to hold off tightening until at least 2019. The latest poll suggests rate increases could come even later, with three of 32 economists predicting the first hike in 2020, compared to none in the previous survey.

All 19 forecasters who replied to both polls either held or lowered their rate estimates, highlighting how investors’ enthusiasm for Bolsonaro’s presidency is giving the bank room to provide additional support for a slow economic recovery even as inflation trends higher.

“Inflation is rising, but very slowly. Now that we can safely disregard the risk of additional currency weakness, at least in the short term, there is no reason for the central bank to rush,” said Luciano Rostagno, chief strategist at Mizuho Securities.

Bolsonaro, a former Army captain who has pledged to clean up politics, shrink the state and crack down on crime, beat leftist Fernando Haddad in a second round vote on Sunday with 55.2 percent of votes.

Investors have cheered Bolsonaro’s ascent, relieved that he could keep the left out of power and hopeful that he would carry out fiscal reforms proposed by the University of Chicago-trained banker he tapped as his main economic adviser.

The Brazilian real BRBY, which flirted with all-time lows in September amid a global emerging market selloff, has rebounded in October as polls showed Bolsonaro gaining ground. The currency jumped 1.5 percent on Monday as Brazilian markets rallied in the wake of Bolsonaro’s victory.

A stronger currency could make imports cheaper, reinforcing the outlook for slow inflation in coming months.

In its last policy meeting in September, the bank said it could raise rates if the outlook worsened, in a clear nod to currency weakness at the time.

Even as headline inflation rose past this year’s goal of 4.5 percent, so-called core inflation, which strips the index of volatile components, remains subdued as a result of a slow economic recovery and high unemployment.

Bolsonaro’s challenge now is rallying support in Congress for his proposed fiscal austerity, particularly a plan to overhaul the nation’s costly pension system which is seen as key to curbing growth of public debt.

Bolsonaro’s right-wing Social Liberal Party (PSL) won the second-most votes in the lower house of Congress, but he will need a broad coalition to pass constitutional amendments required by the pension plan.

Some fear his aggressive rhetoric, with vows to sweep political opponents off the map and comments denigrating women, gays and racial minorities, could put off more moderate allies.

Reporting by Bruno Federowski; Editing by Alistair Bell

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