Brazil set for steep rate cut despite political storm

Brazil's central bank is widely expected to maintain its rapid pace of interest rate cuts on Wednesday despite a political crisis that has clouded the future of an economy slowly emerging from its worst recession ever.

Corruption allegations against President Michel Temer, which threaten to unseat the center-right politician and derail his economic reform agenda, tempered investors' initial bets for an even more aggressive monetary easing cycle.

Less than two weeks ago, before accusations that Temer took bribes from giant meatpacker JBS SA (JBSS3.SA) became public, many analysts believed the bank was set to cut rates by 125 basis points, with its benchmark Selic rate BRCBMP=ECI dropping below 8 percent this year from 11.25 percent.

Now, most economists surveyed in a Reuters poll last week expect the bank to opt for a second straight cut of 100 basis points and continue reducing the Selic until it reaches 8.5 percent by December.

"In the context of the recent political crisis – that has increased risks related to fiscal reform – we believe the bank will choose not to accelerate the pace," Joao Pedro Ribeiro, an economist with Nomura Securities, wrote in a research note.

The scandal has put at risk Temer's proposal to reduce mounting pension expenditures, which the central bank has highlighted as crucial to keep inflation at bay and rescue an economy showing some signs of recovery after two years of recession. Temer has denied he took bribes and vowed to resist calls to resign.

Brazil's gross domestic product BRGDP=ECI probably expanded by 1.0 percent in the first quarter from the last three months of 2016, according to the median forecast of 20 economists surveyed by Reuters. The official data is due out on Thursday at 9 a.m. (1200 GMT).

A delay or further watering down of Temer's pension reform could not only hamper business and consumer confidence, but also prevent efforts to plug a widening fiscal gap that reached over 10 percent of GDP last year.

The central bank's chief, Ilan Goldfajn, has reiterated that political turmoil will not dictate monetary policy that remains focused on inflation, which in mid-May fell well below the 4.5 percent official target.

Source: Reuters