Brazil to hold rates steady as inflation tops 10 percent

By Silvio Cascione

BRASILIA (Reuters) - Brazil is likely to keep interest rates at a nine-year high this week after inflation climbed past 10 percent in the middle of the worst recession in decades, a Reuters poll showed on Monday.

All but one of the 50 economists surveyed expect the central bank to leave its benchmark rate unchanged at 14.25 percent at its Wednesday policy meeting. It will be the last of 2015, which is turning out to be one of the worst years ever for the South American powerhouse.

The central bank raised interest rates for nearly a year ending in July to keep prices under control, with little success. The sharp recession could have helped policymakers curb inflation, but a series of tax hikes and a sharp currency devaluation kept price pressures on the rise instead.

Annual inflation surpassed 10 percent in mid-November , the highest rate in 12 years and far above the government's target of 4.5 percent. There is an increasing risk that the central bank will fail to meet its target in 2016 too, economists have warned, which could prompt policymakers to keep interest rates high or even raise them further next year.

"The conditions to ease monetary policy in the near term are not in the offing," JPMorgan economists led by Cassiana Fernandez wrote in a research note, even though the Brazilian economy is expected to shrink 3.1 percent this year and 2 percent in 2016, according to median market forecasts.

Forecasts for Brazil's interest rates at end-2016 ranged from 11.50 percent to 16.00 percent in the Reuters poll, a wide range for a relatively short-term outlook, in a sign of heightened uncertainty. The median forecast stood at 13.25 percent, signaling Brazilian companies and consumers should not expect much of a boost from looser monetary policy next year.

Economists have debated whether policymakers could use the post-meeting statement to help reduce market uncertainty about its strategy for next year.

"We don't expect the bank to strongly indicate an upcoming hike," said Joao Pedro Ribeiro, Latin America strategist at Nomura Securities, in a research note. "However, we believe the committee could add more clarity to its inflation objectives in particularly 2016 and 2017 – in what would be a marginally hawkish step to official statements."

Only one economist in the poll did not expect the bank to hold rates unchanged this week, forecasting a small 25-basis-point increase instead.

(Reporting by Silvio Cascione; Editing by Dan Grebler)

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