July 26, 2019 / 1:39 PM / 4 months ago

Reform progress paves way for Brazil rates to hit new low: Reuters poll

BRASILIA (Reuters) - Brazil’s central bank is expected to cut its benchmark interest rate to a record low on Wednesday, according to a Reuters poll of economists, to revive a struggling economy and bring inflation back up toward target.

FILE PHOTO: A man walks past a currency exchange office in Rio de Janeiro, Brazil, August 31, 2015. REUTERS/Ricardo Moraes

The median forecast in a poll of 27 economists was for a 25-basis-point cut lowering the base rate to 6.25%. Soft growth and inflation, dovish global central bank policies and progress on domestic reforms have fed expectations of Brazil’s first rate cut since March 2018.

It was a close call, with 10 of the 27 predicting a more aggressive move to 6.00%. Three saw policymakers holding rates.

Whatever the central bank’s policymaking committee, known as Copom, decides at its July 30-31 meeting, economists are nearly unanimous in their view that interest rates are heading lower in the coming months — perhaps dramatically so.

“Important shift toward a more dovish stance across central banks (globally), concrete progress on pension reform, structurally benign inflation and disappointing growth should allow the central bank to cut rates by 50 bps at this month’s meeting,” Bank of America Merrill Lynch economists wrote in a note this week titled “Brazil - A whole new world.”

BAML’s economists are among the most dovish of all, forecasting a Selic rate of 4.75% by the end of this year.

(For a graphic on 'Brazil interest rates' click tmsnrt.rs/2MfrQIw)

Of the 21 economists who gave a view on the skew for rates over the next year, 20 said it is downward and one said it was neutral. In the prior poll last month, 13 out of 19 economists said the skew was downward, five said neutral and one said it was upward.

What is likely to swing Copom toward easing this time around is the recent progress on the government’s economic reform agenda, specifically an overhaul of the country’s expensive social security system.

Roberto Campos Neto, who assumed the central bank’s presidency earlier this year, has played down any direct link between concrete advances on fiscal reforms and lower interest rates. But it is a connection nearly every analyst has made, especially as the economic backdrop has pointed overwhelmingly to looser policy.

The International Monetary Fund this week slashed its 2019 growth forecast for Brazil to 0.8%, in line with the central bank, government and broad market consensus. That would be even weaker than the 1.1% growth in both 2017 and 2018.

Brazil’s economy may have entered a technical recession in the first half of the year, albeit a shallow one, and inflation looks to have peaked. The official consumer price index rose 3.37% in the 12 months through June, the lowest in a year, and well below the central bank’s year-end 4.25% target.

Economists say inflation is also on course to undershoot the central bank’s targets of 4.00% and 3.75% for the next two years, respectively. Political advances on pension reform have helped strengthen the currency almost 10% since May. BRBY

Financial markets have aggressively scaled back their interest rate views recently. This week, July 2020 rates futures contracts DIJN20 fell to a new low below 5.40%, implying the Selic rate will fall least 100 basis points lower in a year.

Reporting by Jamie McGeever; Additional reporting by Gabriel Burin in Buenos Aires; Editing by Brad Haynes and Steve Orlofsky

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