May 16, 2018 / 7:04 AM / a year ago

Brazil set to cut rates again despite FX sell-off

BRASILIA, May 16 (Reuters) - Brazil’s central bank is likely to cut interest rates once again to a new record low on Wednesday despite a currency sell-off as an underwhelming economic recovery keeps a lid on inflation.

The bank’s monetary policy committee, known as Copom, is widely expected to cut the benchmark Selic interest rate by 25 basis points to 6.25 percent at the end of a two-day meeting, according to a Reuters poll of economists.

The decision is expected to be announced at 6 p.m. local time (2100 GMT) on Wednesday.

The near-consensus highlights how stubbornly low inflation has repeatedly frustrated the bank’s plans to halt rate cuts since signaling its intention to do so in February. Inflation is below the bottom end of this year’s target range of 4.5 percent, plus or minus 1.5 percentage points.

With economic indicators spanning everything from retail sales and industrial output to the services sector underwhelming in recent months, it is likely to take a long time before inflation accelerates back to the central bank’s target range.

The weak economy is also expected to limit pass-through from a weak currency, dampening the effect of higher import prices. Concerns over a widening U.S. fiscal deficit and accelerating inflation have bumped up U.S. bond yields, sending emerging markets into a tailspin.

Analysts widely expect that to be the last in the deepest easing cycle in decades, which brought the Selic down from a nine-year high of 14.25 percent in 2015.

“The post-meeting communiqué language will be key for market movements,” Nomura economists João Pedro Ribeiro and Mario Castro wrote in a report. “We continue to expect the Selic rate to remain unchanged throughout the year.” (Reporting by Bruno Federowski; editing by Jonathan Oatis)

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