Brazil set to keep rates on hold

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Sao Paulo - Brazil's central bank will keep its key interest rate on hold at 11 percent a month before its presidential vote despite a recession and inflationary pressures, analysts indicated Tuesday.

Traders forecast no change ahead of a Wednesday decision by the central bank's monetary policy commission (Copom) as it opened a monthly two-day meeting.

Though Latin America's largest economy slid into recession last week, analysts believe the need to rein in inflation which in July crept above an official 6.5 percent ceiling outweighs stimulating consumer spending and easing access to credit via a cut.

Brazil is in a fourth year of anaemic growth and the 2014 forecast is for just a 0.52 percent rise in GDP.

“We don't expect a rate change. There is a small chance of a cut but the possibility is very small given inflation remains high,” said Pedro Tuesta, chief economist of US consultancy 4Cast.

The benchmark Selic rate has not budged since a quarter point rise in April in what was the ninth straight monthly increase as Brazil fought to keep inflation in check.

“We do not expect rate cut this year though we are working on the basis of possible cuts in the Selic rate at the end of next year,” wrote Andre Perfeito, chief economist with Gradual Investimentos in a media note.

Wednesday's decision will come not just against a backdrop of recession but also amid a febrile political atmosphere with environmentalist Marina Silva having emerged in recent weeks as favourite to oust incumbent Dilma Rousseff in next month's presidential election.

Both are running neck-and-neck in first-round voter intentions - but latest polls show Silva as winning a run-off on October 26

by ten points.

“With Dilma, the idea is gaining ground that there is greater concern over growth rather than inflation and the rate could end up at 9.75 percent in 2015,” Sergio Vale, chief economist with MB Associados, told Valor financial daily.

In contrast, pro-Silva economists backing political independence for the Bank believe she would raise rates in a bid to head off even higher inflation.

“This is much more important for long-term growth,” Vale said in assessing a nation where consumer spending is an important motor for growth.

The Bank in 2011 set in train a cycle of monetary expansion which took interest rates down to an historic low of 7.25 percent within a year before inflationary pressures forced a volte face. - Sapa-AFP


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