July 31, 2020 / 2:19 PM / 13 days ago

POLL-Brazil central bank to cut rates to 2.00% next week in final easing move

* reuters://realtime/verb=Open/url=cpurl://apps.cp./Apps/cb-polls?RIC=BRCBMP%3DECI poll data

* Reuters poll graphic on Brazil interest rate and economic outlook: tmsnrt.rs/30fCTIg

By Gabriel Burin

BUENOS AIRES, July 31 (Reuters) - Brazil’s central bank is set to cut its key interest rate to a record low of 2.00% on Wednesday in a final 25 basis points move to cushion an economic collapse amid the worst COVID-19 upsurge in the world outside the United States, a Reuters poll showed.

Wednesday’s reduction would be the ninth of an easing cycle that started a year ago, as policymakers initially sought to boost the economy in light of President Jair Bolsonaro’s poor results in attracting more investment at the beginning of his term.

The health crisis meant the slowdown deteriorated into an historic recession. Officials cut the benchmark Selic rate so much that the real currency dropped by a quarter before stabilizing last month, leaving room for just a residual cut.

Known as Copom, the bank’s rate-setting committee is now expected to trim the Selic to 2.00% from 2.25% on Wednesday, according 35 of 41 analysts polled July 27-30. Six saw no change in the rate.

Brazil’s central bank’s decision “could be accompanied by a signaling that there is no more space for conventional tools,” said Jose Carlos Sanchez, economist at HSBC Global Research in Mexico City.

“Our view rests on the combination of a soft economic landscape and tame inflation mainly driven by COVID-19-related shocks, which have allowed the central bank to take the benchmark rate to new record lows”.

Despite some positive surprises in the latest data indicating Brazil’s 2020 gross domestic product loss may be smaller than previously forecast, a more decisive pickup still looks distant.

The tepid rise in consumer prices in July from the historically low inflation rate of recent months also suggests authorities have some room to cut borrowing costs, as they signaled in their last policy meeting.

Brazilian policymakers would then wait until the third quarter of 2021 before starting to hike rates, the poll showed, three months later than the median long-term view in another survey earlier this month.

Central bank president Roberto Campos Neto recently struck an optimistic note, saying the economy had already started a “V-shaped” recovery on the back of strong fiscal and monetary measures adopted to deal with the emergency.

However, some analysts remain unconvinced in the face of the massive human toll of the pandemic in Brazil, topping 2.5 million cases of the virus and 90,000 deaths, as well as its economic impact.

In response to a separate question, 11 out of 21 economists said the skew for the Selic rate in the next 12 months was “neutral”, while nine saw it tilted to the downside and one said to the upside.

“The main interest rate should stay at 2.00% for the foreseeable future but we can’t rule out further cuts if the economy remains in the doldrums and the virus fails to abate,” said Andres Abadia, senior international economist at Pantheon Macroeconomics.

Bolsonaro’s government could keep expenditure at the present crisis levels if the pickup failed to take hold in coming months, but this would go against earlier promises of a quick return to austerity, potentially disturbing local markets.

The real lost more than 25% from the end of February until mid-May, partly due to the fast erosion of its “carry-trade” advantage as the Copom rushed to cut rates in order to avoid a total economic meltdown.

Credit rating agency Moody’s warned Brazil’s government this week that changes to its fiscal rule limiting the growth in non-obligatory public spending to inflation is putting its long-term goal of reducing the national debt in jeopardy.

Reporting by Gabriel Burin; additional polling by Jamie McGeever; editing by Ross Finley and Nick Zieminski

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