Brazil set to cut rates this week, economists split on size: Reuters poll

October 17, 2016 10:02 AM EDT

File photo of customers shopping near signs advertising promotional sales at a clothing store in Sao Paulo, Brazil, January 8, 2016. REUTERS/Paulo Whitaker

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By Silvio Cascione

BRASILIA (Reuters) - Brazil will probably reduce interest rates this week for the first time in four years, in what is set to be the beginning of a long and deep series of rate cuts expected to help the economy emerge from a two-year-long recession.

Forty-six of 50 economists polled by Reuters expect the central bank to cut its benchmark Selic rate from a decade-high of 14.25 percent on Oct. 19, and only four see the bank keeping rates steady for a tenth straight meeting.

The analysts that expect a move are split about the size of the cut. Half of them expect the bank's policy committee, Copom, to trim the Selic rate by 25 basis points, to 14.00 percent, and the remainder forecast a cut of 50 basis points, to 13.75 percent.

A smaller cut would signal the bank is in no hurry to slash rates as inflation remains high and government efforts to rein in spending are in the early stages of a long battle in Congress.

"From a tactical and also reputational standpoint, the Copom will choose to start the easing cycle with a moderate 25-point rate cut," said Alberto Ramos, head of Latin America economic research at Goldman Sachs.

A larger cut would suggest policymakers feel more confident about hitting the center of their inflation target, 4.5 percent, for the first time this decade. Inflation is currently at 8.48 percent , after topping 10 percent earlier in 2016.

Yields on interest rate futures have dropped in recent days as a fuel price cut, a surprising drop in food costs and a overwhelming government victory in a first-round Congress vote led traders to add bets on a 50-basis-point cut in October.

"We don't see any reason for the Copom not to begin easing monetary conditions on a 50-point pace," said UBS economists led by Rafael de la Fuente in a note.

Rate cuts are seen as crucial to lifting Brazil's economy out of its worst downturn in decades, in a boost to unpopular President Michel Temer and his ambitious agenda of economic reforms and privatizations.

Economists expect the central bank to cut interest rates to 11.00 percent by the end of 2017, according to the median forecast in the poll. Five analysts already see rates falling to single-digits next year, putting Brazil more in line with other Latin American and emerging economies.

(Reporting by Silvio Cascione; Editing by Steve Orlofsky)

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