Brazil set to keep rates steady amid stubbornly high inflation

By Alonso Soto

BRASILIA (Reuters) – Brazil’s central bank is widely expected on Wednesday to hold interest rates at a decade-high, persevering with a policy that has barely dented inflation despite a crippling two-year recession.

All 39 economists polled by Reuters last week said the central bank’s monetary policy committee, known as Copom, would maintain its benchmark Selic rate at 14.25 percent for the ninth straight time.

Although Brazil’s borrowing costs are among the highest for a major economy, inflation has remained stuck at around 9 percent as a surge in food prices offsets a sharp drop in consumer demand.

The country’s stubborn inflation has puzzled economists and raised worries among policymakers that it could threaten an economy they believe could be near a turning point as a political crisis eases and confidence returns in the former emerging market star.

The Brazilian Senate impeached leftist President Dilma Rousseff on Wednesday, confirming her vice president, Michel Temer, as the country’s leader. Temer has pushed a pro-business agenda as interim president since Rousseff was suspended in May over accusations of doctoring fiscal accounts.

Brazil’s gross domestic product contracted in the second quarter as expected but showed signs that its recession may be nearing an end. Investment rose in the quarter after 10 consecutive declines.

The Brazilian real seesawed on Wednesday on fears about the cohesion of Temer’s alliance, which split during another vote on whether to bar Rousseff from holding office in the future.

Central bank chief Ilan Goldfajn has vowed to remain firm in his quest to slow inflation to the official target of 4.5 percent in 2017. The central bank has missed its inflation goal since August 2010 after years of heavy public spending and consumption-based stimulus.

Economists expect Copom in the long run to be more mindful of the nascent economic recovery and take a fairly gentle approach to rate-cutting that would see the Selic rate cut to 11.25 percent by the end of 2017, according to the central bank’s weekly poll.

But they expect the committee on Wednesday to reiterate that there is no room at the moment to cut interest rates.

“We now believe that the monetary easing cycle would only start at the committee’s last meeting of the year, in November,” economists with Banco Fibra said in a note.

(Reporting by Alonso Soto; Editing by Lisa Von Ahn and Paul Simao)