Brazil set to hold interest rates, signal long pause

BRASILIA, July 16 Wed Jul 16, 2014 12:00am EDT

BRASILIA, July 16 (Reuters) - Brazil will likely keep interest rates steady for the second straight time on Wednesday and signal it will leave them there for some time even after inflation hit the ceiling of its target range.

At its last meeting on May 28, the central bank's monetary policy committee halted its year-long rate-hiking campaign and held its benchmark Selic rate at 11 percent to give a respite to an economy that is again flirting with recession.

Disappointing growth data will likely keep the central bank, led by Alexandre Tombini, from raising interest rates for the rest of 2014 even though inflation is expected to stay high for the next two years.

"We believe that even with inflation hovering around the target's ceiling, slow economic growth will force the central bank to keep interest rates at this level until at least the end of 2014," economists with Santander wrote in a research note.

All 60 economists surveyed in a Reuters poll last week predicted that Brazil's central bank will hold interest rates, with most saying they expect the bank to leave rates unchanged for the rest of the year.

The mix of high inflation and slow economic growth poses a major challenge for Tombini and President Dilma Rousseff, whose popularity has suffered in recent months as Brazilians grow increasingly frustrated with the weak economy and rising prices.

Nevertheless, polls show Rousseff remains the frontrunner heading into presidential elections on Oct. 5, though her political rivals are using Brazil's mounting economic woes to attack the leftist leader.

The central bank is trying to cool inflation expectations by insisting that a Selic rate at 11 percent is enough to bring the IPCA consumer price index back toward the 4.5 percent center of the target range in 2015 and 2016.

Goldman Sachs economist Alberto Ramos believes the central bank will remove the phrase "at this moment" from Wednesday's monetary policy statement to cement the idea that policymakers will leave rates stable for some time.

A still overvalued Brazilian real, that is bound to weaken, and naggingly high inflation will likely push the central bank to ultimately lift rates in 2015, Ramos said.

"All this due to the inability to tighten fiscal policy and the reluctance to hike rates further to get a firmer grip on inflation," he said in a research note.

A surge in government spending ahead of the elections, combined with supply bottlenecks and high demand for services have kept inflation well above the center of the target range since 2011.

Prices have eased on a monthly basis since March, but 12-month inflation hit the 6.5 percent target ceiling in June. Inflation is expected to remain under pressure going forward, in part because certain government-regulated prices such as gasoline and electricity fares are due to be raised. (Editing by Todd Benson and Andrew Hay)

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