Reuters: US Dollar Report: UPDATE 1-Brazil poised to end year of interest rate cuts

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UPDATE 1-Brazil poised to end year of interest rate cuts Nov 28th 2012, 13:39 Wed Nov 28, 2012 8:39am EST * Central bank likely to hold Selic rate at 7.25 percent * Bank seen keeping rate at record lows in 2013 * High inflation outweighs worries over slow-paced recovery By Alonso Soto BRASILIA, Nov 28 (Reuters) - Brazil looks set to end a year-long cycle of aggressive interest rate cuts on Wednesday, leaving its benchmark rate unchanged at a record low of 7.25 percent to try to keep a lid on inflation despite doubts about a slow economic recovery. All 60 analysts polled by Reuters expect the central bank's monetary policy committee to pause its rate-cutting cycle after 10 straight cuts that lopped 525 basis points off the overnight Selic rate. A majority of market traders also predict a pause, with only 16 percent betting on another cut of 25 basis points, according to Thomson Reuters data. A barrage of government stimulus measures and steep interest rate cuts have started to slowly pull the world's sixth-largest economy out of near-stagnation, but they have also stoked fears that higher inflation will return to a country with a history of runaway price increases. "Real interest rates at this level are fine temporarily because we have a global downturn and officials are trying to stimulate the economy, but it's something that we don't think can last indefinitely without letting the inflation genie out of the bottle," said analyst Mary Stokes of Timetric in London. She said she expected the central bank to keep rates at the current level for at least the next six months. Low interest rates have been one the main priorities of President Dilma Rousseff as she struggles to bring back the impressive growth rates that made Brazil a Wall Street darling in the past decade. The central bank seems in no hurry to raise rates, saying at its last rate decision on Oct. 10 that the Selic could remain stable for a "sufficiently prolonged period of time." A majority of analysts in last week's Reuters poll forecast the benchmark rate will stay at 7.25 percent during 2013. Most overnight interest rate futures contracts in Brazil fell on Wednesday, meaning that traders are betting the bank will keep the Selic near its current level well into 2013. Interest rate futures due in January 2014, the most traded contract, dropped 27 basis points to 7.26 percent. The central bank has acknowledged that low rates could keep inflation above the center of the official target range of 4.5 percent - plus or minus two percentage points - for the next couple of years. The bank insists, however, that it will not allow prices to pierce the ceiling of 6.5 percent. Central bank President Alexandre Tombini said last week that the economy would surely recover with inflation under control. Inflation quickened to 5.64 percent in the month to mid-November, and private economists expect it to end the year at 5.4 percent. PRESSURE BUILDS UP However, the slow-moving recovery and a fragile global economy could raise pressure on Brazilian policymakers to inject more stimulus into the economy. Rousseff has already hinted that the country's currency, the real, could depreciate further to revive manufacturing, the weakest leg of the economy. A weaker currency helps manufacturers battle foreign competition, but also raises inflationary pressures at home. The real fell 0.50 percent on Wednesday morning to 2.089 per dollar, approaching the limit of what traders consider an informal trading band of 2.0 to 2.1. Brazil's economy will probably grow just 1.5 percent this year even after billions of dollars in tax breaks and cheap loans released by the Rousseff administration. The interest rate cuts have helped lift the economy, but may not be enough to rekindle growth above 4 percent per year. Private economists are starting to lower their 2013 growth estimates to a shade below 4 percent after a weak report on economic activity in September and a drop in consumer confidence in November point to an uneven recovery ahead. Analysts at Morgan Stanley warn that investment shows no signs of a strong rebound going into 2013, indicating the market remains overly optimistic about the vitality of the Brazilian economy. The U.S. investment bank predicts the Brazilian economy will grow a meager 2.8 percent next year. Anemic investment, high production costs and lack of skilled labor are blamed for stunting growth in Brazil as consumers start to reach their debt limits after a credit boom. The central bank will announce its rate decision after 6 p.m. (2000 GMT). Link this Share this Digg this Email Reprints

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