Slow inflation to keep Brazil from raising rates for longer

BRASILIA: Brazil's central bank is likely to refrain from raising interest rates next week and hold them at an all-time low for longer than expected as a slow and uneven economic recovery keeps a lid on inflation.

The bank's monetary policy committee, known as Copom, will probably keep the benchmark Selic at 6.50 percent on Wednesday at the end of a two-day meeting, according to all of 35 economists polled by Reuters.

That would be the sixth straight meeting where the bank stands pat, underscoring the amount of excess capacity still plaguing Latin America's largest economy two years after it emerged from its deepest recession in decades.

A double-digit jobless rate has curbed wage hikes, while economic growth remains steady but not explosive.

Those factors have kept inflation pressures at bay even as categories such as food and energy prices - which the central bank has little power to influence - rose. Even those one-off pressures, however, seem to have faded, with consumer prices falling the most in more than a year in November.

The inflation rate is currently hovering at 4.05 percent, below the 4.5 percent midpoint of this year's target range as well as the 4.25 percent target for 2019. A weekly central bank survey of economists put the 2019 year-end rate at 4.11 percent, suggesting policymakers may have been caught by surprise by the amount of labor market slack.

"There is absolutely no reason for the central bank to rush at this point," Mizuho Securities strategist Luciano Rostagno said.

Only four of 33 economists who replied to an extra question expected the bank to hike rates before the second half of 2019, while six predicted it would stand pat until 2020. All 20 who participated in both this poll and the one taken before the bank's previous meeting in October either kept or lowered their interest rate forecasts.

The results highlight how concerns over a recent inflation spike driven by higher power rates have all but died down.

Meanwhile, fears of an imminent currency selloff that could lift prices eased after far-right lawmaker Jair Bolsonaro, who has pledged to erase a gaping budget deficit, defeated leftist rival Fernando Haddad in the presidential elections.

In its latest policy statement, the bank acknowledged that upward risks to inflation have diminished. Accordingly, a recent Reuters poll showed that the Brazilian real was likely to hold in the coming 12 months in a sign of investor confidence in Bolsonaro.

Yet the bank is also expected to stress once again that keeping rates low will hinge on passing unpopular reforms, such as a plan to cut pension spending that Bolsonaro's predecessor Michel Temer failed to get through congress.

Contradictory statements from within Bolsonaro's team, as well as his track record of denigrating women and minorities, mean that is hardly a done deal.

Next week's meeting is likely to be the penultimate one before current central bank chief Ilan Goldfajn is replaced by Bolsonaro's pick, Roberto Campos Neto. The current members of the central bank's board are likely to remain at their posts for the time being, Goldfajn has said.