BRASILIA: Brazil will likely cut its benchmark interest rate by half a percentage point for the fourth consecutive meeting on Wednesday in a bid to shield its fragile economic recovery from the European debt crisis.
The central bank is holding its first monetary policy meeting of the year and is expected to release its decision after 6 p.m. (2000 GMT). All 31 analysts surveyed by Reuters expect the bank to cut the rate to 10.50 percent.
The bank is struggling to balance the needs of an economy whose growth ground to a halt in the third quarter with worryingly high inflation, which ended 2011 at 6.5 percent. That was right at the ceiling of the bank's official target range, and the highest year-end figure in seven years.
The bank has cut its Selic rate by 1.5 percentage points since August, as central bank president Alexandre Tombini predicted that the 12-month inflation figure would slowly decline from a September peak even with looser monetary policy.
So far, Tombini has been proven right. The main question now is whether Latin America's biggest economy will remain weak, allowing for further rate cuts, or whether an unexpectedly vigorous recovery could bring the easing cycle to a halt.
"The stronger the start of the year is for the economy, the less space the bank will have to keep cutting," said Luis Otavio de Souza Leal, chief economist with Banco ABC Brasil.
"The market has priced in two rate cuts this year, but a third one remains a question mark."
President Dilma Rousseff has made it a main priority of her government to bring down Brazil's interest rates, which are among the world's highest. The central bank enjoys de facto autonomy to make its own rate decisions but under Tombini it has also worked in close coordination with Rousseff's economic team.
A gloomier global economy prompted the Chilean central bank to follow in Brazil's footsteps and surprise the market with a 25-basis-points rate cut earlier in January. Mexico, another regional powerhouse, is seen opting for caution and holding its rate steady when the central bank meets on Friday.
The Brazilian central bank rate cuts and a slew of government stimulus measures helped the economy bounce back in November after it flat-lined in the third quarter.
The interest rate futures market is pricing in a 50 basis points cut on Wednesday but investors are betting the rate will end the year at 10 percent.
In contrast, most analysts in a central bank weekly poll of economists see the rate dropping to 9.50 percent in the same period.
Worries over further inflation pressures in Brazil are also starting to resurface.
A drought in southern Brazil and heavy rainfall in the southeastern region has hit some grain harvests and could lift food prices in the first quarter of the year, analysts say.
The size of a government spending freeze to be announced by the government in coming weeks would also be crucial to determine the future path of monetary policy.
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