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UPDATE 2-Brazil to slash rates again, focus on size of cut
March 7, 2012 / 2:15 PM / 6 years ago

UPDATE 2-Brazil to slash rates again, focus on size of cut

* 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 (Reuters) - 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 economy.

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 ceiling.

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.

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