The benchmark Selic rate has been in a holding pattern since the last in a series of hikes in July 2015, as the central bank struggled to tamp down double-digit inflation amid the country’s worst recession in a century.
Now, with inflation dipping in September to 8.48% and the government embarking on economic reforms to control spending and encourage investment, the bank appears ready to change gears.
Market analysts expect a 0.25 to 0.5 percentage point cut, although this would still leave Brazil’s rate far above 10% in Russia or 6.25% in India, among other emerging giants.
New, market-friendly central bank governor Ilan Goldfajn is expected to oversee further rate cuts before the year ends.
“The Brazilian economy desperately needs lower interest rates,” wrote Vinicius Torres Freire, economics editor at Folha de Sao Paulo newspaper.
The central bank publication Focus said a survey of economists found expectations of a year-end Selic rate of 13.5%, falling to 11% by the end of 2017.
Brazil’s lowest rates were 7.25% during October 2012 to April 2013 when the economy was growing strongly.
Last year saw a 3.8% dip in GDP and this year the economy is expected to shrink a further 3%. Prices, however, are finally on the retreat, with Focus forecasting 7.01% inflation for the end of 2016, falling to 5.04% next year. The central bank target is 4.5%.
The recession has left 12mn Brazilians out of work, according to government statistics, and has seen the three main international rating agencies cut Brazil’s credit to junk status.
Latin America’s biggest economy has been hit hard by falling world commodity prices and a bitter political struggle that led to the impeachment of former president Dilma Rousseff, as well as a massive corruption scandal at state flagship company Petrobras.
Rousseff’s replacement Michel Temer is turning Brazil away from her leftist policies and last week pushed through a bill in an initial lower house vote that would cap government spending for 20 years.
The proposal’s approval on its first vote was an important victory for Temer, who plans to enact labour and pension reforms next year.
Temer has warned of state “bankruptcy” if the country does not impose painful reforms.