Brazilian policymakers have been walking a fine line since August, when the central bank surprised markets by starting to cut the benchmark Selic rate despite annual inflation running above a 6.5 percent target ceiling.
The move thrust central bank chief Alexandre Tombini into an uncomfortable spotlight as economists said he risked letting price pressures run out of control in a country with a history of hyper inflation in the 1980s and 1990s.
But Tombini now looks prescient. A worsening debt crisis in Europe is clouding the global economy, inflation has begun to ease in Brazil, and recent indicators show the country’s economy may have contracted in the third quarter.
In a Reuters poll, 32 analysts unanimously predicted the central bank will cut rates again by 50 basis points to 11 percent. Some see the easing cycle taking rates as low as 9 percent by the end of 2012.
Yields on interest rate futures contracts also priced in an interest rate cut of 50 basis points at Wednesday’s meeting, the central bank’s last of the year.
“The external scenario may require a more aggressive policy response if events take a turn for the worse, meaning that the Central Bank should ‘conserve ammunition’ and avoid cutting rates more aggressively now,” HSBC said in a note to clients.
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