Brazil may cut key rate further
LOS ANGELES (MarketWatch) -- Brazil's central bank is expected to cut country's key interest rate late Wednesday, and analysts say a still-fragile recovery may lead to yet more cuts.
Brazil is expected by analysts to grow by less than 2% this year, the lowest pace of growth since Latin America's largest economy came out of recession in 2009.
Over the last year, the Brazilian government has shaved nearly 5 percentage points off the key rate and has enacted stimulus measures aimed at spurring consumer and corporate spending and bolstering exports.
But the benchmark rate may be cut further this year, as only a few signs of recovery have recently cropped up.
"The overall policy design that's in place at this point in time necessitates another move to the downside," for the key rate from the current -- and historic low -- level of 8%, said Enrique Alvarez, head of Latin American research at IDEAglobal.
"The medium-term perspective is what is somewhat murky because that's where the real risks are located," Alvarez said.
Brazil's policy interest rate, known as the Selic, will likely be reduced by half a percentage point to 7.5%, according to analysts polled by Dow Jones Newswires. That move would mark the ninth consecutive rate reduction.
Some analysts have pointed to a rise in retail sales and in a leading indicator of economic growth in June as signs that economic activity will pick up in the second half of 2012.
But confirmation may not arrive until October because of the lagged effects of the policies enacted by Brazilian officials, said Geoffrey Pazzanese, co-manager of the $530 million Federated InterContinental Fund (RIMAX) , which is overweight Brazilian equities.
"Assuming that the economy starts recovering, monetary easing should finally come to an end very soon," wrote analysts at Handelsbanken Capital Markets, who also expect the rate to be cut to 7.5% on Wednesday.
"The next step from the [Brazilian central bank] is very data-dependent, but the market expectation is for another 50 [basis points] cut before the easing campaign is over," the Handelsbanken analysts said.
Worries about sluggish growth were reflected in the latest survey of economists and analysts conducted by the central bank.
Analysts chopped their growth projections for gross domestic product to 1.73%, down from 1.75% a week ago. Analysts at the start of the year expected GDP to expand by more than 3%.
Investor concerns about slowing growth worldwide, particularly in China -- Brazil's biggest trading partner -- and about intervention in the foreign exchange market by Brazilian officials working to curb currency appreciation have taken a toll on Brazilian stocks.
The Ibovespa equity index (BVSP) had surged as much as 21% earlier this year, seeking to erase its 18.1% tumble in 2011. But after recent losses, the year-to-date gains have been sliced to about 3%.
The widely watched MSCI Brazil Index is in the red, down roughly 6% since the start of the year, as is the
The Brazilian government has cut its 2012 growth expectations as well, with its projection now standing at 2.5%. In 2011, the economy grew 2.7%, slowing sharply from 7.5% in 2010.
It was at the August 2011 meeting that policy makers at Banco Central do Brasil, citing "substantial deterioration" in growth outlooks for major economies, unexpectedly cut the key rate by a half-percentage point to 12%. Market players had expected the rate to be held at 12.5% following five rate hikes aimed at battling inflation.
Inflation this year has come down from the 2011 level of 6.5% -- the high end of the central bank's target range -- but recent readings have highlighted building pressures.
"There have been some surprises in the last two [inflation] releases ... seen as a bump related to [local] weather conditions that have put pressure on some foods," including vegetables, said Andre Loes, an Brazil-based economist covering Latin America at HSBC.
Inflation in the 12-months through July climbed to 5.2%, reversing a trend of declining inflation that had taken place since September. The central bank's inflation target is 4.5%, plus or minus two percentage points.
Upcoming inflation reports are poised to reflect the impact from a surge in international prices of corn and grains, said Loes.
He foresees the central bank cutting the key rate to 7.5% on Wednesday, and for the Selic to finish the year at 7%.