Brazil set to end year of interest rate cuts

Wed Nov 28, 2012 12:59am EST

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By Alonso Soto

BRASILIA, Nov 28 (Reuters) - Brazil will likely end an aggressive year-long cycle of interest rate cuts on Wednesday, leaving its benchmark rate unchanged at 7.25 percent to try to keep a lid on inflation despite doubts about the strength of recovery in the world's No. 6 economy.

All 60 analysts polled by Reuters expect the central bank's monetary policy committee to opt for a pause its rate-cutting cycle after 10 s t raight cuts that brought rates to a record low.

A majority of market traders also predict a pause, with only 16 percent betting on another cut of 25 basis points, according to Thomson Reuters data.

A barrage of government stimulus measures and steep interest rate cuts have started to slowly pull the economy out of near stagnation, but they have also stoked fears of higher inflation in coming years in a country scarred by a history of runaway prices.

"Inflation at the moment is not such a big issue, but if you look ahead it could become a problem because inflationary pressures are here and annual inflation remains close to the ceiling of the target," said Cristian Maggio, emerging market strategist at TD Securities in London.

"They (central bank) are done with the easing cycle, and will hold interest rates at the current level for the whole of next year," Maggio predicted.

Low interest rates have been one the main priorities of President Dilma Rousseff as she struggles to bring back the impressive growth rates that made Brazil a Wall Street darling in the past decade.

The central bank seems in no hurry to raise rates, saying that rates could remain stable for a "sufficiently prolonged period of time". A majority of analysts polled by Reuters last week forecast the benchmark rate will stay at 7.25 percent during 2013.

The bank has acknowledged that low rates could keep inflation above the center of the official target range of 4.5 percent - plus or minus two percentage points - for the next couple of years. The bank insists, however, that it will not allow prices to pierce the ceiling of 6.5 percent.

Central bank President Alexandre Tombini said last week that the economy will surely recover with inflation under control. Inflation quickened to 5.64 percent in the month to mid-November and is expected to end the year at 5.4 percent.

PRESSURE BUILDS UP

However, the slow-moving recovery and a fragile global economy could raise pressure on Brazilian policymakers to inject more stimulus into the economy.

Rousseff has already hinted that the country's currency, the Brazilian real, could depreciate further to revive what has been the weakest leg of the economy: manufacturing. A weaker currency helps manufacturers battle foreign competition, but also raises inflationary pressures at home.

Brazil's economy will likely grow just 1.5 percent this year even after billions of dollars in tax breaks and cheap loans released by the Rousseff administration. The 525 basis points in rate cuts by the central bank have helped lift the economy, but may not be enough to rekindle growth above 4 percent per year.

Private economists are starting to lower their 2013 growth estimates to a shade below 4 percent after a weak economic activity print in September and a drop in confidence levels point to an uneven recovery ahead.

Analysts at Morgan Stanley warn that the market remains overly optimistic about the vitality of the Brazilian economy as investment shows no signs of a strong rebound going into 2013. The U.S. investment bank predicts the Brazilian economy will grow a meager 2.8 percent next year.

Anemic investment, high production costs and lack of skilled labor are blamed for stunting growth in Brazil as consumers start to reach their debt limits after a credit boom.

The central bank will announce its rate decision after 6 p.m. (2000 GMT).

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