UPDATE 3-Brazil ends year-long easing cycle, signals steady rate ahead

Wed Nov 28, 2012 5:47pm EST

* Central bank as expected holds Selic rate at 7.25 percent
    * Bank hints will keep rate at record lows in 2013
    * High inflation outweighs worries over slow-paced recovery


    By Alonso Soto
    BRASILIA, Nov 28 (Reuters) - Brazil ended a year of
aggressive interest rate cuts on Wednesday, leaving its
benchmark rate unchanged at a record low to try to
keep a lid on inflation, despite doubts about an uneven economic
recovery.
    The decision by the bank's rate-setting committee to hold
the rate at 7.25 percent was unanimous, showing the solid
conviction of policymakers to pause the easing cycle after ten
straight cuts that trimmed 525 basis points off the Selic rate. 
     All 60 analysts polled by Reuters expected the central bank
to leave the rate unchanged. An overwhelming majority of market
traders had also predicted a pause with only 6 percent betting
on another 25 basis-point cut, 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. The moves have also stoked fears of higher
inflation in coming years in a country scarred by a history of
runaway prices.   
    The central bank repeated exactly the same language from its
last decision statement, saying that monetary conditions should
remain stable for a "sufficiently prolonged period of time" to
curb inflation. 
    Low interest rates have been one of the main priorities of
President Dilma Rousseff as she struggles to bring back the
impressive growth that made Brazil a Wall Street darling in the
past decade. 
    Under the leadership of Alexandre Tombini the central bank
has undertaken one of the most aggressive easing cycles among
major economies. He has vowed to hike rates to control inflation
if needed. Analysts doubt that could happen any time soon.  
    "The guidance provided by the bank continues to be one very
similar to that of the U.S. Federal Reserve in that this is our
low rate boundary and we are going to stay here for the
foreseeable future," said Enrique Alvarez, head of Latin America
research for IDEAglobal.
    "It doesn't seem that the bank is going to move from that
position unless conditions change very significantly."
    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 says, however, that price increases
will not pierce the ceiling of 6.5 percent. 
    The central bank has said structural changes to the
Brazilian economy allow for lower interest rates without
necessarily stoking inflation. Inflation quickened to 5.64
percent in the month to mid-November and is expected to end the
year at 5.4 percent.INVESTMENT PROBLEMS 
    However, an uneven 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
despite billions of dollars in tax breaks and cheap loans
released by the Rousseff administration. The central bank's
aggressive actions 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 as the country's
historically low investment levels fail to react to the cocktail
of stimulus.
    Analysts at Morgan Stanley and Deutsche Bank warn that the
Brazilian economy could be headed for years of lackluster growth
as the government fails to bolster public and private
investment. Morgan Stanley even predicts the Brazilian economy
will grow a meager 2.8 percent next year.
    Growing government intervention in key sectors of the
economy is also hurting investment, some analysts say. The
government's push for electricity companies to cut power rates
in exchange for the renewal of their concessions has more than
halved the stock price of top utility Centrais Eletricas
Brasileiras SA in a matter of a few days. 
     Investment probably shrank for the fifth quarter in a row
in the third quarter, according to forecasts by analysts polled
by Reuters. The economy is expected to have expanded 1.2 percent
in the third quarter versus the previous quarter. 
     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.
    Investment equals about 19 percent of Brazil's gross
domestic products, well below the 45 percent and 35 percent in
BRICS' peers China and India respectively.
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