July 31, 2019 / 4:35 PM / 20 days ago

Brazil central bank seen cutting interest rates to fresh low

BRASILIA (Reuters) - Brazil’s central bank is widely expected to cut its benchmark interest rate to a record low on Wednesday, although economists are divided on the pace and depth of an easing cycle aimed at shoring up a sputtering economy.

The median forecast in a recent Reuters poll of economists was for a 25-basis-point cut lowering the base rate to 6.25% — a cautious approach for the first rate cut since March 2018.

Yet a significant minority of economists expect the central bank’s monetary policy committee, known as Copom, will cut the rate more aggressively to 6.00%, based on subdued inflation, a firming currency and recent progress on fiscal reforms.

Copom is expected to announce its decision soon after 6 p.m. local time (2100 GMT) on Wednesday.

The central bank’s recently named President Roberto Campos Neto has played down any immediate link between advances on an overhaul of Brazil’s social security system and lower interest rates. But nearly every analyst has made the connection, especially as the economic backdrop has pointed overwhelmingly to looser policy.

The U.S. Federal Reserve is widely expected to cut interest rates for the first time in more than a decade on Wednesday, contributing to a dovish global outlook and giving Brazil more room to spur on a weak economy.

The International Monetary Fund this month slashed its 2019 growth forecast for Brazil to 0.8%, in line with the central bank, government and broad market consensus. That would be even weaker than the 1.1% growth in both 2017 and 2018.

Brazil’s economy may have entered a technical recession in the first half of the year, albeit a shallow one, and inflation looks to have peaked. The official consumer price index rose 3.37% in the 12 months through June, the smallest increase in a year, and well below the central bank’s year-end 4.25% target.

Economists say inflation is also on course to undershoot the central bank’s targets of 4.00% and 3.75% for the next two years, respectively. Political advances on pension reform have helped strengthen the currency almost 10% since May. BRBY

Financial markets have aggressively scaled back their interest rate views recently. This week, July 2020 rates futures contracts DIJN20 fell to a new low below 5.40%, implying the Selic rate will fall least 100 basis points lower in a year.

Reporting by Jamie McGeever; Editing by Brad Haynes and Richard Chang

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