Brazil's central bank to cut rates by half point to 10.5% to boost growth: analysts

“The general expectation of the market is that the rate will be cut another half-point” Wednesday when the bank's monetary policy committee wraps up its meeting, which kicked off Tuesday, said Harold Thau, an analyst with the consulting firm Tecnica.

“It is in line with the other measures that the government has been implementing to spur Brazilian growth,” he added.

Dozens of analysts and market operators consulted weekly by the central bank, also agreed that the base rate will be cut to 10.5 percent, which would still be among the highest in the world.

The central bank had cut its base rate by half point to 11 percent in late November, the third reduction since August, when monetary authorities reversed course following a series of rate hikes to clamp down on inflation.

The bank's determination to spur growth by easing monetary policy had triggered criticism from the market.

Consumer prices rose 6.5 percent in 2011, reaching the upper limit of the official target.

The government had set an annual inflation target of 4.5 percent, with a ceiling of 6.5 percent.

“The inflation has been fueled above all by the higher commodities prices, which with the crisis in the United States and Europe, have started to fall and this has allowed a softer policy as there is no risk of runaway inflation,” said Thau.

But other analysts said the bank is jeopardizing its independence and the priority to fight inflation by aligning itself with the government's priorities.

“Although it has fallen since September, Brazilian inflation is still high,” the economic daily Valor said in an editorial this week.

Market analysts hope the base rate will continue to fall this year to reach 9.5 percent on an annualized basis, but Valor said the Central Bank could “halt this cycle of monetary easing before.”

The economy expanded less than three percent last year, sharply lower than the 7.5 percent recorded in 2010.

The country's productive sectors are calling for an end to high interest rates and the main labor unions have called for a demonstration Wednesday outside the central bank headquarters in Sao Paulo to demand that monetary authorities keep on easing rates.

“We are going to press for a continued reduction of the base rate,” said Paulo Pereira da Silva, head of the union Forca Sindical. “A rate acts as a stimulus to create new jobs and increase the country's production.”

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