Brazil Analysts Forecast Steeper Interest Rate Cuts in 2016

Brazil economists reduced their forecast for the 2016 year-end benchmark interest rate just days before the central bank’s next decision on monetary policy.

The Selic rate will fall to 13.5 percent by the end of this year from the current level of 14.25 percent, according to the central bank survey of about 100 analysts published Oct. 17. That compares to the previous week’s estimate of 13.75 percent. It was the first time since May that analysts cut that forecast.

Inflation last month was the slowest in over two years, and traders have increased bets policy makers will lower the key rate on Oct. 19 for the first time since 2012. The lower house last week approved legislation to curb public spending in a first round vote, and state-controlled oil company Petroleo Brasileiro SA said it would cut prices, both of which may ease price pressure.

“The central bank has no excuse right now to not cut the interest rate,” Andre Perfeito, chief economist at Gradual Investimentos, said by phone. Brazil’s government has the "political power to make the changes that the Brazilian central bank wants, and that market participants want.”

Analysts reduced their 2016 and 2017 year-end inflation estimates to 7.01 percent and 5.04 percent from 7.04 percent and 5.06 percent, respectively. Both forecasts are above the 4.5 percent midpoint of the central bank’s target range. Expectations could fall further as economists weigh the impact of fuel price cuts announced on Friday, according to Thais Zara, chief economist at Sao Paulo-based consulting firm Rosenberg Consultores Associados.

Swap rates on the contract maturing in January 2018, a gauge of expectations for interest-rate moves, rose 0.03 percentage point to 12 percent at 10:25 a.m. local time after touching a 23-month low on Friday. The real, gained 0.2 percent to 3.2004 per U.S. dollar.

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