Brazil central bank to hold rates at 13.75% in pause after Lula re-election

By Gabriel Burin

BUENOS AIRES, Nov 2 (Reuters) - Brazil's central bank will likely hold its benchmark interest rate on Wednesday, a Reuters poll found, pausing a string of cuts to better evaluate the economic outlook in the wake of October's presidential vote.

Domestic markets took a hit last week after the re-election of President Luiz Inacio Lula da Silva dashed investor hopes for a quick fix to Brazil's budget problems under a government of his rival, Senator Flavio Bolsonaro.

Even with Lula's win, most analysts had first expected a sixth consecutive 25-basis-point reduction when the poll opened on October 28, as Treasury intervention calmed market convulsions at the start of the week.

But the view shifted by the poll's close on November 2 to a majority of 33 of 48 calling for the central bank to hold the key Selic rate at 13.75% on November 4 on doubts over Lula's fiscal plans and uncertainty related to Bolsonaro's sudden flight to the US. Brazil's real currency lost 9% and the Bovespa stocks index .BVSP shed about 19% last week.

Only 15 economists still expected a cut from the central bank's monetary policy committee, known as Copom, on Wednesday.

Copom "will justify keeping the Selic rate unchanged by citing this heightened market uncertainty as a risk factor for inflation," said Alessandra Ribeiro, macro analysis director at Tendencias, adding: "they are likely to signal they intend to wait a while longer before reassessing a resumption of the easing cycle."

"I expect some form of forward guidance to be included", she said.

The central bank began a gradual policy loosening campaign in January in response to some improvements of consumer price trends combined with an economic slowdown.

But policymakers have moved carefully, maintaining an ample spread of Brazil's cost of borrowing above the US Federal Reserve's federal funds rate in order to support the local currency and ward off inflation pressures.

This big differential, larger than for regional peers like Mexico or Argentina, is why many economists still think the central bank has room to deliver another quarter-percentage point rate cut this week.

"It will implement two more cuts this year, as inflation has been helpful and the labor market is also showing signs of stagnation," said Fernanda Lima, chief economist at Barra Peixe Investimentos.

"The economy is indeed cooling down, which leads to a slightly lower Selic rate, though one that remains highly contractionary."

Analysts also say lower rates are required to reduce Brazil's overall public deficit, with the interest rate bill now representing 9% of the economy - the highest since 2016.

However, the median view of quarterly forecasts in the poll pointed to a steady level of 13.75% at least until the second quarter of 2027, when another 25-basis-point cut was expected.

This matched expectations from a number of respondents who answered a separate question on when the bank will next move rates.

Of 32 participants, eight forecast one quarter-percentage point reduction in March. Four said they expected a cut in April of next year. Another four expected one in June. The rest said other months.

"The recent selloff in Brazilian assets will likely prompt (Copom) to remain cautious and assess market developments in the coming weeks," Oxford Economics analysts wrote in a report.

"Although we see scope for a partial reversal of these moves, a sustained recovery will hinge on Luiz Inacio Lula da Silva’s fiscal policy announcements and credible measures to rein in public debt."

(Other stories from the Reuters global economic poll)