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Brazil poised to keep rates on hold as inflation remains high

[BRASILIA] Brazil's central bank will likely keep interest rates on hold for the seventh straight time on Wednesday, resisting pressure to lower borrowing costs amid a recession as inflation remains well above its official target.

All 43 economists surveyed by Reuters expect the central bank's policy committee, known as Copom, to hold its benchmark rate at 14.25 per cent, a near 10-year high.

A deepening recession and lingering political turmoil is renewing pressure on the central bank to start cutting borrowing costs to give a breather to local producers and consumers struggling with high rates and rising loan defaults.

Interim President Michel Temer, who took over from President Dilma Rousseff as she stands trial for allegedly breaking budget laws, has vowed a shift toward more market-friendly policies in a bid to regain the interest of investors in the once-booming economy.

"With the change in government and return of economic policy credibility we believe monetary policy could be placed on stimulus mode," economists with Banco Fibra wrote in a research note.

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"However that will only happen when inflation expectations fall to be more in line with the official target."

Although he will not take part in this decision, the bank's next central bank chief Ilan Goldfajn, a Wall Street economist and former bank director, has signaled he is in no rush to lower rates.

At his Senate confirmation hearing on Tuesday, Mr Goldfajn said the new government needs to create the conditions for interest rates to fall, like closing a yawning fiscal gap that cost Brazil its coveted investment grade rating last year.

Mr Goldfajn also vowed to bring inflation back to its 4.5 per cent centre of the target and rebuild the pillars of the famous "tripod" policy framework of low inflation, free-floating exchange rate and fiscal responsibility.

In May, when Mr Goldfajn was still the chief economist for the country's largest lender Itau Unibanco, he predicted the bank would start a rate-cutting cycle in July as the inflation outlook improved.

However, inflation expectations have rebounded recently after a series of higher-than-expected consumer price index prints.

Inflation rose 9.62 per cent in the 12 months through mid-May , up from 9.34 per cent in mid-April and above market expectations.


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