Brazil set to cut interest rates once again as inflation underwhelms

SAO PAULO (Reuters) – The Brazilian central bank is likely to cut interest rates once again to a new low on Wednesday as stubbornly muted inflation derailed its plans to halt monetary easing.

The bank’s monetary policy committee, known as Copom, is widely expected to reduce the benchmark Selic interest rate by 25 basis points to 6.50 percent at the end of a two-day-meeting, according to a Reuters poll of economists.

The decision is expected to be announced at 6 p.m. local time (2100 GMT) on Wednesday.

Investors will watch the bank’s policy statement closely for clues on the possibility of a further cut at its May meeting.

While most expect this week’s reduction to be the last in the deepest easing cycle in a decade, the bank may choose to keep its options open after getting caught on the backfoot by a string of weak inflation figures.

“In the February minutes, the committee stated that low and falling core inflation could open room for additional monetary easing, and we believe this is exactly what most recent indicators have been showing,” Santander (MC:) Brasil economists wrote in a report.

“Copom will probably, in our view, leave the door open for an additional cut in May should inflation expectations continue to fall”.

The bank had strongly hinted that it intended to halt interest cuts at its last policy statement but the minutes to that meeting suggested some disagreement over that message.

Earlier this month, central bank chief Ilan Goldfajn acknowledged that policymakers were surprised by the slow pace of price hikes, stoking bets on further rate cuts.

After ending last year below the bottom-end of the government’s target range, inflation continues to underwhelm this year amid double-digit unemployment rates and widespread idle capacity.

Economic growth has picked up following the deepest recession in decades, but the recovery has been more uneven than expected. As the most wide-open and hard-to-predict elections in over twenty years fast approaching, the case for easy monetary policy is not a hard sell.

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