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A Single Economist Sees Brazil Cutting Rates This Week

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Only one of the 28 economists surveyed by Bloomberg expects Brazil’s central bank to cut its benchmark interest rate on Wednesday. Yet his call sounds more like wishful thinking.

Financial markets largely bet the Selic rate will remain at an all-time low of 6.5 percent until there are concrete signals that President Jair Bolsonaro’s proposal to overhaul the social security system is advancing in Congress. Uncertainty about the approval of reforms is one of the main reasons cited by the central bank not to ease monetary policy further.

“The central bank can’t wait for the pension bill’s approval,” said Austin Rating’s chief economist Alex Agostini, who expects the rate to be cut to 6 percent on Wednesday. “Inflation is under control and the outlook for the economic recovery only gets worse. Will the central bank wait until GDP forecasts turn negative?”

Economists have lowered their forecast for Brazil’s gross domestic product in 2019 to 1.49 percent from about 2.5 percent in the beginning of the year. Odds that Latin America’s largest economy contracted in the first quarter have also increased after industrial production and job creation data disappointed.

Despite seeing strong arguments for further monetary easing, Agostini acknowledges that the chances of a rate cut this week aren’t high, as the central bank hasn’t signaled an imminent rate cut in its communications.

“It’s not that I literally believe that the central bank will cut the Selic rate on Wednesday, but we want to position ourselves to what the central bank should do,” he said. “The central bank can’t miss this window of opportunity.”