* Central bank expected to cut rate to 10 percent from 10.5
* Some betting on larger cut as gov't seeks to curb currency
* Weak GDP data fuel debate about need for deeper rate cut
* Industrial output tumble in January adds to speculation
By Alonso Soto
BRASILIA, March 7 Brazil is likely to
slash its benchmark interest rate by half a percentage point to
10 percent on Wednesday as inflation eases, though a
batch of disappointing economic data has fueled speculation a
larger cut may be on the cards.
The central bank is trying to bolster the economy without
rekindling inflation, which has slowed this year after ending
2011 at a seven-year high of 6.5 percent. With Brazilian
industry suffering under the yoke of a strong currency and high
taxes, some investors are betting on a more aggressive rate cut
to kick start an economy that cooled dramatically last year.
"These awful economic numbers may tilt the balance in favor
of a more aggressive cut," said Luis Otavio de Souza Leal, chief
economist at Banco ABC Brasil, who is still expecting the
central bank to opt for a fifth straight rate cut of half a
percentage point. "Arguments for both sides are very strong."
The rate decision comes on a day when data showed that
industrial output in Brazil slumped a larger-than-expected 2.1
percent in January from the previous month, highlighting the
shrinking role of manufacturing in Latin America's largest
The weak industrial numbers were the latest in a string of
data suggesting that Brazil's boom is fizzling. On Tuesday,
official data showed that Brazil underperformed its regional and
emerging market peers last year, with economic growth braking
sharply to 2.7 percent from 7.5 percent in 2010.
Still, the numbers also pointed to a moderate recovery
ahead, which Finance Minister Guido Mantega vowed on Tuesday to
support with further stimulus measures this year.
Yields on interest rate futures fell sharply for a
second day on Wednesday in the wake of the industrial numbers,
meaning that traders believe the bank may opt for more
aggressive rate cuts to revive activity.
Four of the 42 analysts surveyed by Reuters have revised
their forecasts since the poll was released last week to bet on
a larger rate cut. The rest held their views for another rate
cut of half a percentage point but acknowledged that a more
aggressive move could not be ruled out.
"Pressure to step up the pace of interest rate cuts is
building," said Capital Economics analyst Neil Shearing who
changed his estimate to a larger cut after the release of the
weaker industrial output figures.
The central bank's monetary policy committee, known as
Copom, will announce its rate decision after 6 p.m. (2100 GMT).
GROWTH BELOW POTENTIAL
Central bank chief Alexandre Tombini has worked closely with
President Dilma Rousseff to lower interest rates to allow Brazil
to grow at full potential.
Tombini, a U.S.-trained economist, has led the push to trim
two percentage points off the so-called Selic rate since August
as he sees inflation converging to the center of the official
target range with the help of a slower global economy .
Brazil's inflation target is 4.5 percent, with a tolerance
band of 2 percentage points either way.
Inflation slowed to an 11-month low of 6.22 percent in
January. Analysts expect it to continue this downward trend but
still end the year above 5 percent.
Initially criticized for starting to cut interest
rates too early, Tombini was proven right after the economy
slowed sharply and inflation eased from its official target
He has signaled that the easing cycle may continue by saying
the economy is growing below potential, which means there is
room for more rate cuts without risking runaway inflation.
But Tombini has also warned of risks to the recovery by
pointing to a resurgence of foreign capital inflows that
bolstered the value of Brazil's currency, the real, which
gained 8 percent in the first two months of the year.
The Rousseff government has taken measures to try to limit
capital inflows, and the central bank has stepped up
intervention in the currency market, all aimed at preventing the
real from strengthening further.
In theory, an interest rate cut would also help limit
capital inflows by reducing the returns of investors seeking
higher profits in emerging markets. But even at 10 percent,
Brazilian interest rates would remain among the world's highest.
Rousseff, a career economist, has blamed the developed world
for a "tsunami" of cheap money flooding emerging market nations
and undermining their industries.