Brazil holds interest rates to avoid deepening recession

[BRASILIA] Brazil's central bank kept interest rates on hold on Wednesday as widely expected, opting to avoid inflicting more harm on an economy mired in its worst recession in decades despite a surge in inflation.

In a split vote, the bank's monetary policy committee, known as Copom, kept its benchmark Selic rate at 14.25 per cent for the fifth straight time. An overwhelming majority of analysts expected the bank to maintain borrowing costs at a near-decade high.

Two of the Copom's eight members once again dissented and voted for a 50-basis-point rate hike.

A statement from the bank repeated almost exactly the language from its previous meeting, arguing that the global economic downturn was the main reason to hold borrowing costs steady.

The bank is under growing pressure from businesses and politicians to start cutting rates that are the highest among G-20 countries so as to help an economy on track for its worst recession since at least 1901.

"The central bank once again showed it's not worried with rising inflation expectations. It lost its credibility," said Juan Jensen, partner with 4E Consultoria in Sao Paulo.

"This is a central bank that is more lenient with inflation. It is not worried about inflation."

Mr Jensen is among a growing chorus of economists who believe the bank will cut rates later this year to prioritize growth over inflation, which is well above the 4.5 per cent center of the official target.

Central bank chief Alexandre Tombini has said inflation has peaked and should start to drop in coming months, but he has publicly denied that policymakers are considering cuts any time soon.

President Dilma Rousseff, who is facing the risk of impeachment in Congress, has started to ease austerity to try to jump-start the economy, which is expected to contract nearly 8 per cent between 2015 and 2016.

The central bank surprised markets at its last meeting on Jan 20 by failing to hike rates after signaling higher borrowing costs, raising fears of political interference.

Unlike its peers in Mexico and Chile, the Brazilian central bank does not enjoy complete autonomy.

The central bank is betting that the deepening recession that left 1.5 million Brazilians unemployed last year will curb prices later in 2016.

Inflation, however, has continued to accelerate.

Annual inflation in the month to mid-February unexpectedly climbed to a 12-year high of 10.84 per cent due to higher food, education and transport prices.

Although high, price increases remain far from the triple-digit hyperinflation Brazil saw in the 1990s.

REUTERS