With pension reform on hold, Brazil unlikely to cut rate further

Wednesday, February 14, 2018

Brazil's central bank is expected to keep its benchmark Selic interest rate unchanged in the next months, as the absence of a pension reform will prevent any additional reduction.

Last week, the central bank slashed its Selic base rate to a new low of 6.75% from 7%. This marked the 11th consecutive reduction since October 2016, when the monetary authority started the easing cycle. Back then, the rate was at 14.25%.

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"The Banco Central do Brazil will hold interest rates steady over the coming quarters as inflation trends higher and the prospects for pension reform fade," BMI Research said.

"Inflation will remain within the bank's target range but trend higher over the coming months, underpinned by rebounding domestic demand and higher average energy prices. Additional rate cuts could be triggered if pension reform is passed, although the probability of passage is falling."

The administration of President Michel Temer is facing huge challenges to secure enough support to approve the highly unpopular pension reform.

The head of the lower house, Rodrigo Maia, last year postponed the reform's vote in the lower house to later this month. Maia is reportedly now considering leaving the vote for next year, meaning a new government would have to deal with the difficult issue.

Brazilians will vote for a new president, state governors, senators and lower house lawmakers in October. The elections have made it difficult for politicians to rally behind a reform that has very little support among the general public.

The government needs strong political support to secure approval of the reform since it involves constitutional changes. To pass, at least 308 of 513 lower house lawmakers must vote in favor in two voting rounds, followed by two rounds of voting in the senate.