Brazil may opt for smaller rate hike as economy sputters

BRASILIA: Brazil's central bank will likely slow the pace of interest rate hikes at its monetary policy meeting week as the economy risks sputtering in an election year, according to the prevailing view of analysts polled by Reuters.

Twenty-nine out of 44 economists polled by Reuters expect the bank to raise its benchmark Selic interest rate by 25 basis points to 10.25 percent on Wednesday. Fourteen see a 50 bps point increase, and one expects rates to remain steady at their current 10 percent.

The central bank has raised rates by 50 bps in its last five policy meetings, but this failed to curb inflation from running close to 6 percent annually.

With prospects of very weak growth this year, many analysts question the central bank's resolve to keep raising rates aggressively to dampen inflation ahead of presidential elections in October, in which President Dilma Rousseff is expected to run for re-election.

The Reuters interest rate poll was conducted between Wednesday and Thursday, before December inflation numbers came in as higher than expected when released on Friday. Consumer prices rose 5.91 percent in 2013.

"Markets should price in more tightening, but we stand behind our view that the central bank will slow the pace of tightening to 25 basis points next week," wrote Barclays economists Marcelo Salomon and Bruno Rovai in a research note on Friday.

Yields on interest rate futures rose as traders increased bets on a more prolonged tightening cycle following the release of the December inflation data.

Even though Brazil's Selic is already the highest benchmark interest rate among the world's major economies, the Reuters poll median forecast saw the Selic at 10.5 percent at the end of 2014.

That is a far cry from the historic low of 7.25 percent rate seen until last April, when the central bank began its rate-hiking cycle with a 25 bps increase in the Selic, followed by a string of 50 bps rate hikes.

Most of Rousseff's popularity stems from record-low unemployment rates, a legacy of the rapid economic growth seen during the last decade.

But a tight labor market has added to cost pressures for companies a factor highlighted by central bank chief Tombini in explaining why inflation rose more than expected last year.

Inflation has failed to slow even as Brazil's economy contracted in the third quarter for the first time in four years.