Brazil to keep slow pace of rate cuts amid political turmoil: Reuters poll

A view of Brazil's Central Bank in Brasilia

By Silvio Cascione

BRASILIA (Reuters) – Brazil’s central bank probably will continue cutting interest rates at a glacial pace next week despite a deepening recession, a Reuters poll showed on Friday, as a new political scandal weakened the currency and cast doubts on austerity measures.

All but 10 of the 61 economists surveyed by Reuters expect the central bank in its second consecutive meeting to trim the benchmark Selic rate by 25 basis points to 13.75 percent on Wednesday. The remainder forecast a 50-point cut. <BRCBMP=ECI>

On the same day, data probably will show Brazil’s historic recession deepened between July and September with a 0.8-percent seasonally adjusted drop, according to the poll.

Economists said Brazil’s currency slump to near five-month lows probably will discourage the central bank to cut interest rates faster, which would help rekindle growth. Markets have fretted over potential investigations of President Michel Temer and allies.

Temer’s minister in charge of relations with Congress, Geddel Vieira Lima, resigned on Friday following an accusation that he had pressured another minister to approve a property investment.

More accusations against leaders of Temer’s PMDB party are expected to surface in an imminent leniency deal with engineering conglomerate Odebrecht SA that could incriminate as many as 200 lawmakers.

“The question is whether this turmoil is going to pass or if it is permanent,” said Alessandra Ribeiro, an economist with Sao Paulo-based research firm TendĂȘncias. “If Temer is implicated, he will be weakened and that would mean much smaller odds of approving crucial reforms next year.”

Economists have long expected the economy to emerge from recession in late 2016. Falling inflation would allow the central bank to cut interest rates off decade highs, easing the burden over indebted consumers and companies.

However, a weaker currency could raise prices of fuel and other imports. Also, prices for services are not dropping as fast as policymakers wish, the central bank said in October.

The potential impact of U.S. President-elect Donald Trump on foreign exchange markets added to concerns.

“It is be very difficult to see the bank accelerating the pace of cuts,” said David Beker, chief Brazil economist at Bank of America Merrill Lynch. “If they had already been cutting rates by 50 points, they would keep that pace. But as they started with 25, it would be hard to justify a bolder move now.”

The Selic rate is projected at 11.00 percent at end-2017, according to the median forecast in the poll.

(Reporting by Silvio Cascione; Editing by Bill Trott)