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Brazil expected to keep key interest rate steady at 6.5%

[BRASÍLIA] Brazil's Central Bank was expected to maintain its key Selic interest rate steady at 6.5 per cent on Wednesday, following a bump in inflation prompted by the depreciating real and a painful truck drivers' strike.

The strike paralysed much of Brazil's economy for almost two weeks in May, emptying stores of consumer goods, drying up fuel supplies and sending prices briefly soaring. The event was blamed for inflation of 1.26 per cent in June, the highest rate since the start of 2016.

However, "the evolution of prices indicates that the effects of the truckers' strike is starting to reverse, returning to the rhythm of before," said Infinity Assets, an investment consultancy.

On a 12-month basis, inflation was at 4.39 per cent in June, up from 2.86 per cent in May. However, even this spike remained within the upper 4.5 per cent end of the government's targeted inflation range.

The market consensus is for 4.11 per cent inflation in 2018.

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Meanwhile, the real has stabilised at around 3.70 to the dollar after having dipped almost to the four real mark, its lowest value in two years.

US trading tensions and expectations at the Fed for higher interest rates has pulled money out of emerging markets like Brazil.

However, there has been some respite for Brazil investors, who are welcoming increased momentum for center-right former Sao Paulo governor Geraldo Alckmin in the October presidential race, said Alex Agostini, from the Austin Rating consultancy.

"He has shown he is concerned with controling inflation and intends to attack the debt problem. His platform is in line with what the market wants to hear," Mr Agostini said.

The Central Bank made 12 consecutive rate cuts ending in March, bringing the Selic to a historic low.

Analysts expect it to remain there until the end of the year before rising to around eight per cent next year.


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