October 29, 2014 / 5:00 AM / 5 years ago

Brazil set to hold interest rates ahead of policy changes

BRASILIA, Oct 29 (Reuters) - Brazil’s central bank will likely keep interest rates steady for a fourth straight time on Wednesday, holding its ground until President Dilma Rousseff announces changes to economic policy following her narrow re-election victory.

All 43 economists surveyed in a Reuters poll expect the central bank to keep its benchmark Selic rate unchanged at 11 percent.

After narrowly defeating centrist Senator Aecio Neves on Sunday, Rousseff has pledged to change her economic team and alter policies to turn around an economy that cost her support among Brazil’s middle class voters.

The central bank will likely stay put for now until those changes are unveiled, analysts say.

“(The bank board) will be looking to indications of changes in the economic policy mix, particularly changes on the fiscal side, which will impact their decision-making going forward,” said Blue Macellari, senior Latin America strategist for TD Securities in New York.

“The real question is whether the bank will have a more supportive fiscal environment.”

Markets are eagerly awaiting Rousseff’s nomination of a new finance minister. Whomever takes the job will face the daunting task of regaining the trust of investors worried about growing state intervention and the country’s financial health.

Rousseff is considering a former aide, her chief of staff and a businessman to replace Finance Minister Guido Mantega, who will step down at the start of her second four-year term on New Year’s day.

The most urgent task of her new team will be to staunch the bleeding in Brazil’s fiscal accounts to ward off the threat of a credit downgrade next year.

Less public spending in 2015 will ease inflationary pressure, allowing the central bank either to keep rates on hold for longer or opt for smaller rate increases.

Most analysts are betting that the central bank will have to raise rates next year to slow consumption further, which has pushed inflation above the 6.5 percent ceiling of the official target. The central bank aims to keep inflation at the center of the target, between 2.5 and 6.5 percent.

The sharp depreciation of the real, which has slipped more than 12 percent since September, is also adding to inflationary pressure. A weaker real increases the value of imports.

Central bank chief Alexandre Tombini has warned that the bank will not be complacent and that it is ready to resume a year-long tightening cycle if needed to bring down inflation. The bank forecasts inflation to stay high in the next two years, but gradually move back to the target’s center.

The central bank drastically cut rates to record lows in 2012, but was forced to raise them again following a spike in public expenditures and after a severe drought accelerated inflation.

“A promising approach to reducing inflation requires coordination of fiscal and monetary policies... For this reason, we believe rate hikes will come only after the president’s inauguration,” Santander economists said in a recent client note. (Reporting by Alonso Soto; Editing by Dan Grebler)

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