Brazil keeps rates steady, sees no room for cuts yet

By Alonso Soto

BRASILIA (Reuters) – Brazil’s central bank kept interest rates on hold for the eighth consecutive meeting on Wednesday as expected, despite a deep recession, as a new board cited concern about stubbornly high inflation and uncertainty surrounding economic reforms.

In a longer and more detailed decision statement than in the past, the central bank said its nine-member board voted unanimously to leave the benchmark Selic rate at 14.25 percent, a nearly 10-year high. The rate has remained unchanged for a year.

“Taken together, the basic scenario and current balance of risks indicate there is no room to flexibilize monetary policy,” read the statement, released online shortly after the policy meeting ended.

The bank’s new governor Ilan Goldfajn, who took office in June, is aiming to improve communication and recover the credibility of a central bank that has failed to hit the 4.5 percent center of its official inflation target since 2010.

In a statement that differed greatly from the laconic ones of the recent past, the bank said its own 2017 inflation forecast had dropped to the target of around 4.5 percent, from a previous reading of 4.7 percent.

Still, it warned of lingering risks to reaching that goal, including the possibility that persistently high inflation could increase future expectations for sustained price rises.

Annual inflation likely remained close to 9 percent in mid July. [L1N1A519J]

Economists were divided on whether the bank could cut rates as soon as its next meeting in late August or wait until October. In a Reuters poll last week, most economists expected an initial rate cut in October.

“So if from now until the next meeting we have significant currency appreciation, positive inflation surprises or even tangible progress on the fiscal consolidation agenda, I think a rate cut in August could be in play,” said Alberto Ramos, senior economist with Goldman Sachs.

Other economists interpreted the statement as a clear indication the bank will only lower borrowing costs in October when indicators improve and political uncertainty eases.

Most emerging-market economies, including recession-hit Russia and China, are forecast to either cut rates or keep monetary policy loose as the world economy continues its long and sluggish recovery.

The central bank said uncertainty about the interim government’s capacity to approve bold austerity measures and persistently high short-term inflation could complicate efforts to reach its inflation goal next year.

Brazil’s fiscal deficit stood at 10.08 percent of gross domestic product in May, up from 2.6 percent in May 2013.

Interim President Michel Temer, who has replaced leftist President Dilma Rousseff while she stands trial for allegations she broke fiscal rules, is working to build congressional support for unpopular economic reforms.

Despite a crippling recession now in its second year, Goldfajn has vowed to keep rates unchanged as long as needed to curb inflation expectations in a country scarred by hyperinflation as recently as the early 1990s.

(Additional reporting by Flavia Bohone in Sao Paulo; Editing by Daniel Flynn, Brad Haynes and Andrew Hay)