* Central bank set to cut benchmark rate to 8.50 pct
* External risks, sluggish economy pave way for cut
* More interest rate cuts possible as inflation eases
By Alonso Soto
BRASILIA, May 30 (Reuters) – Brazil’s central bank will
likely slash its benchmark interest rate on Wednesday to a
record low of 8.50 percent from 9 percent, in what would be the
seventh straight rate cut as policymakers race to shore up a
sluggish economy.
Faced with a surprisingly sharp slowdown at home and a
worsening global economic outlook, Brazil’s central bank has
embarked on an aggressive easing cycle, lopping 350 basis points
off its overnight lending rate since August.
Thirty-eight out of 41 economists surveyed by Reuters expect
the bank to lower the so-called Selic rate by 50 basis points at
the conclusion of a two-day monetary policy meeting later on
Wednesday. Two economists bet on a deeper cut of 75 basis
points, while one predicted a reduction of just 25 basis points.
The bank’s monetary policy committee, known as Copom, will
announce its decision after 6 p.m. local time (2100 GMT).
A 50 basis-point cut would mark a slowdown in the pace of
easing, after two consecutive reductions of 75 basis points in
March and April. The central bank signaled after its April
policy meeting that future rate cuts might be more cautious.
“We believe the central bank is more likely to go for a more
moderate 50 basis points given that the fiscal authorities have
recently announced additional economic stimulus measures,”
Alberto Ramos, a senior economist with Goldman Sachs in New
York, said in a note to clients.
President Dilma Rousseff has sought to revive the economy
with a barrage of tax breaks and credit incentives for targeted
industries, with the latest measures benefiting automakers.
Rousseff is also trying to create conditions for Brazilian
interest rates – long among the world’s highest – to keep
falling by keeping a lid on public spending and pressuring banks
to lower rates on both corporate and individual loans.
In a politically sensitive move, her government recently
scrapped the fixed rate of return on domestic savings accounts,
removing one of the main obstacles preventing interest rates
from falling further.
For the last century, savings accounts carried a fixed
return of about 6 percent annually, which, once tax incentives
and other factors were taken into account, amounted to a de
facto floor for the Selic rate at its current level.
Brazil’s high interest rates are a legacy of the days of
runaway inflation in the late 1980s and early 1990s, a traumatic
era that has left policymakers and politicians of all stripes
extremely cautious about price stability.
MONETARY POLICY LAG
Annual inflation has eased steadily this year to within the
official target range of 4.5 percent plus or minus two
percentage points, giving more space for the central bank to
continue cutting interest rates.
The economy, however, has been slow to react to the steep
drop in borrowing costs and the government’s stimulus measures.
Brazil’s gross domestic product is expected to have expanded
just 0.5 percent in the first quarter from the previous quarter,
according to the median forecast of 29 analysts surveyed by
Reuters. Official GDP data will be released on Friday.
In an interview with Reuters on Monday, Finance Minister
Guido Mantega acknowledged the economy could grow 3 to 4 percent
this year, down from an initial forecast of 4.5 percent. Brazil
grew only 2.7 percent in 2011, behind most regional peers and
even Germany.
The slowdown has been a disappointment for an economy that
surpassed Britain last year as the world’s sixth largest, and
has put renewed focus on the need for deeper economic reforms in
Brazil to resume higher growth rates.
Central bank chief Alexandre Tombini has said the pace of
the recovery is slower than expected, but reiterated that the
effects of the easing cycle and government tax breaks will be
felt later this year.
Most market economists forecast the Selic will end the year
at 8 percent and stay at single digits for most of Rousseff’s
term in office, which runs through 2014.
