July 27, 2018 / 5:43 PM / 10 months ago

Brazil set to hold rates at record low despite inflation spike: Reuters poll

BRASILIA (Reuters) - Brazil is likely to hold interest rates at an all-time low next week even after product shortages due to a truckers’ strike sharply lifted inflation, a Reuters poll of economists showed.

Most forecasters kept their bets that rates will not rise until 2019, as it becomes increasingly clear that the effect of the nationwide protests on economic activity is bound to keep a lid on price pressures.

The central bank’s monetary policy committee, known as Copom, will probably keep the benchmark Selic rate at 6.50 percent on Wednesday after its two-day meeting, according to all 40 economists surveyed by Reuters.

Consensus emerged even after inflation soared from 2.7 percent in mid-May to 4.5 percent in mid-July, breaching the midpoint of the central bank’s target range for the first time in over a year.

Truckers protesting high diesel prices blocked major highways in the final weeks of May, driving farmers to cull their flocks and dump spoiled milk. Yet the inflation spike is likely to prove temporary, despite the major blow to economic activity, according to a recent Reuters poll. [ECILT/LTAM]

Widespread idle capacity among companies, as well as high unemployment, are bound to ease any short-term price pressures, while market expectations for inflation seem well-anchored, Banco MUFG Brasil economist Mauricio Nakahodo said.

That should keep the central bank from hiking anytime soon. Only two of 37 economists who replied to an additional question expected a hike this year. The most dovish forecaster, Pezco Micro, predicted that the bank will turn to tightening only by the second quarter of 2020.

Twenty of the 27 economists who had also replied to the same question in a June poll maintained their predictions, suggesting the protest had little effect on the outlook for monetary policy. Five pushed back their hike forecasts, while two pulled them forward.

The central bank has repeatedly stressed that the protests made it hard to distinguish temporary shocks from long-term changes to the underlying economic outlook. It said that economic indicators for May and June would play a key role in clarifying that distinction.

Observers will now turn to the bank’s policy statement next week in search of an updated assessment. Still, with the October presidential election bound to be the most hard-to-predict in decades, it may be difficult for policymakers to offer any concrete hints on the outlook for interest rates in the medium term.

Reporting by Bruno Federowski; Editing by Dan Grebler

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