August 25, 2011 / 5:35 PM / 8 years ago

PREVIEW-Brazil seen holding Selic at 12.5 percent

WHAT: Decision on Brazil’s benchmark Selic interest rate

WHEN: Wednesday, Aug. 31, after 7 p.m. (2200 GMT)

REUTERS FORECAST: All 20 analysts polled by Reuters see the central bank keeping its benchmark Selic lending rate unchanged at 12.5 percent next week and all but two forecasts expect the rate to remain stable through the end of the year.

One analyst expected the benchmark rate to come down to 12 percent by year-end and another saw it at 11.5 percent.

FACTORS TO WATCH: Signs of a slowdown in Latin America’s biggest economy combined with a dimmer outlook for global growth suggest the end of the central bank’s recent tightening cycle, leaving the benchmark Selic rate at a 30-month high.

A drop in Brazil’s June economic activity, weaker manufacturing data and flagging retail sales have led many economists to forecast weaker growth this year, suggesting looser monetary policy — as two analysts expect by year-end.

But with inflation relentlessly climbing to new six-year highs, the central bank will be hesitant to cut rates quickly. Twelve-month inflation through mid-August climbed to 7.1 percent — well above the target ceiling of 6.5 percent.

The labor market also remains tight despite growth concerns, with unemployment near record lows and higher wages driving inflationary pressures. Wage growth could remain robust through the second half, when key collective bargaining agreements will be decided.

Even when the job market was cooler amid the global crisis beginning in 2008, three in four unions inked contracts for higher real wages, according to a note to clients from RBS Global Banking & Markets.

“It would just be too soon to signal rate cuts,” RBS analyst Siobhan Morden wrote in a Thursday note. She said lowering rates now would also put Brazil out of step with the rest of Latin America, where rate cuts aren’t expected until the fourth quarter at the earliest.

MARKET IMPACT: Interest rate futures <0#DIJ:> have swung sharply in recent weeks. At one point, they incorporated expectations of a 12 percent Selic rate by September, but they have quickly returned in line with economists’ more conservative outlook.

Investors will be particularly attentive to any new dovish language in the statement accompanying the bank’s decision.

A surprise interest rate cut next week could erode market confidence in policymakers' commitment to its inflation target, putting further downward pressure on the Bovespa stock index .BVSP, which has shed around 24 percent this year.

Reporting by Brad Haynes and Vanessa Stelzer; Editing by Andrew Hay

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