May 30, 2012 / 5:02 AM / 5 years ago

Brazil readies 7th straight interest rate cut

* Central bank set to cut benchmark rate to 8.50 pct

* External risks, sluggish economy pave way for cut

* More interest rate cuts possible as inflation eases

By Alonso Soto

BRASILIA, May 30 (Reuters) - Brazil’s central bank will likely slash its benchmark interest rate on Wednesday to a record low of 8.50 percent from 9 percent, in what would be the seventh straight rate cut as policymakers race to shore up a sluggish economy.

Faced with a surprisingly sharp slowdown at home and a worsening global economic outlook, Brazil’s central bank has embarked on an aggressive easing cycle, lopping 350 basis points off its overnight lending rate since August.

Thirty-eight out of 41 economists surveyed by Reuters expect the bank to lower the so-called Selic rate by 50 basis points at the conclusion of a two-day monetary policy meeting later on Wednesday. Two economists bet on a deeper cut of 75 basis points, while one predicted a reduction of just 25 basis points.

The bank’s monetary policy committee, known as Copom, will announce its decision after 6 p.m. local time (2100 GMT).

A 50 basis-point cut would mark a slowdown in the pace of easing, after two consecutive reductions of 75 basis points in March and April. The central bank signaled after its April policy meeting that future rate cuts might be more cautious.

“We believe the central bank is more likely to go for a more moderate 50 basis points given that the fiscal authorities have recently announced additional economic stimulus measures,” Alberto Ramos, a senior economist with Goldman Sachs in New York, said in a note to clients.

President Dilma Rousseff has sought to revive the economy with a barrage of tax breaks and credit incentives for targeted industries, with the latest measures benefiting automakers.

Rousseff is also trying to create conditions for Brazilian interest rates - long among the world’s highest - to keep falling by keeping a lid on public spending and pressuring banks to lower rates on both corporate and individual loans.

In a politically sensitive move, her government recently scrapped the fixed rate of return on domestic savings accounts, removing one of the main obstacles preventing interest rates from falling further.

For the last century, savings accounts carried a fixed return of about 6 percent annually, which, once tax incentives and other factors were taken into account, amounted to a de facto floor for the Selic rate at its current level.

Brazil’s high interest rates are a legacy of the days of runaway inflation in the late 1980s and early 1990s, a traumatic era that has left policymakers and politicians of all stripes extremely cautious about price stability.

MONETARY POLICY LAG

Annual inflation has eased steadily this year to within the official target range of 4.5 percent plus or minus two percentage points, giving more space for the central bank to continue cutting interest rates.

The economy, however, has been slow to react to the steep drop in borrowing costs and the government’s stimulus measures.

Brazil’s gross domestic product is expected to have expanded just 0.5 percent in the first quarter from the previous quarter, according to the median forecast of 29 analysts surveyed by Reuters. Official GDP data will be released on Friday.

In an interview with Reuters on Monday, Finance Minister Guido Mantega acknowledged the economy could grow 3 to 4 percent this year, down from an initial forecast of 4.5 percent. Brazil grew only 2.7 percent in 2011, behind most regional peers and even Germany.

The slowdown has been a disappointment for an economy that surpassed Britain last year as the world’s sixth largest, and has put renewed focus on the need for deeper economic reforms in Brazil to resume higher growth rates.

Central bank chief Alexandre Tombini has said the pace of the recovery is slower than expected, but reiterated that the effects of the easing cycle and government tax breaks will be felt later this year.

Most market economists forecast the Selic will end the year at 8 percent and stay at single digits for most of Rousseff’s term in office, which runs through 2014.

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