Brazil holds interest rate after long easing cycle

Brazil's central bank kept benchmark borrowing costs steady on Wednesday as policymakers halted an easing cycle that's been partly credited with jumpstarting Latin America's largest economy. The bank's monetary policy committee, known as the Copom, voted unanimously to hold the Selic at its current record-low 8.75 percent, in line with analyst expectations.
Bank officials have hacked 500 basis points off the rate so far this year. "Taking into account, on one hand, the easing of monetary policy implemented since January and, on the other hand, the factory capacity gap among other factors, the committee believes that this level is consistent with a benign inflation scenario," read a statement the committee issued on the decision.
Of 27 economists polled by Reuters, 26 expected the central bank to leave the rate untouched. Only one analyst forecast a 25-basis-point cut to 8.5 percent. The pause in the easing cycle comes as Latin America's largest economy shows continued signs of a recovery, stoking fears of a possible increase in consumer prices in the months ahead.
The country's jobless rate unexpectedly fell in July, a fourth straight month of drops, while retail sales volumes in June beat forecasts, as well. Analysts expect Brazil to emerge from recession faster than more developed economies.
"The decision shows that (they) have ended the process and will stay with the rate at this level for a while. The expectation of a strong economic recovery and its eventual effects on inflation are giving them some well-founded degree of caution now," said Roberto Padovani, chief economist of WestLB. Annual inflation in Brazil has remained below the central bank's target of 4.5 percent, plus or minus two percentage points, for two straight months, underscoring a benign scenario for consumer prices.
The country's 12-month inflation rate to mid-August was 4.34 percent, compared to 4.47 percent in the year to mid-July and the 4.5 percent in the year through the end of July, according to government figures. Economists in a weekly central bank survey expect the benchmark IPCA inflation index will fall within the government's target this year. Brazil's economy fell into recession in the first quarter of this year, contracting 0.8 percent after a 3.6 percent plunge in the last quarter of 2008.
Economists expect the country's second-quarter growth to show a recovery is underway. Nevertheless, Brazil's gross domestic product is expected to contract 0.3 percent this year, according to the latest weekly central bank survey of local financial institutions.