Brazil expected to keep interest rate at 6.5%

Brazil's Central Bank President Ilan Goldfajn has dispelled speculation over a rates hike

Brazil's central bank is expected to maintain interest rates at 6.5 percent Wednesday after deciding that strong depreciation of the real and a costly truckers' strike have not fed inflation beyond current limits, analysts say.

"Monetary policy depends on the evolution of inflation... and it will not be used to control the exchange rates," bank chairman Ilan Goldfajn said earlier this month in an attempt to dispel speculation over a rates hike in reaction to the currency turmoil.

The central bank interrupted a series of 12 consecutive cuts to the key Selic rate in May, citing volatility in the markets and investor frustration over the government's inability to push through pension reform and other long-delayed austerity measures.

Interest rate hikes in the United States and a growing trade dispute between Washington and Beijing have contributed to the instability in Brazil, with emerging markets investors withdrawing capital to safe havens.

One early sign of the turmoil has been the strengthening of the dollar, which traded at nearly $4 two weeks ago for the first time in two years.

The bank has intervened with $24.5 billion to try and prop up the real and will inject another $10 billion this week.

Goldfajn has also sought to bolster market nerves by noting the country's "solid" economic fundamentals, including low inflation and $380 billion in reserves.

Latin America's biggest economy is slowly emerging from its worst recession in history, which extended through 2015 and 2016.

But in May, an extended truckers' strike brought the economy to its knees, adding to a rising sense of political uncertainty ahead of general elections in October. So far, no strong candidate backs President Michel Temer's stalled market reforms program.

GDP growth projections for 2018 have fallen from 2.45 percent just five weeks ago to 1.76 percent in the latest central bank survey of market expectations. At the start of the year, the forecast was for three percent economic growth.

Inflation projections, meanwhile, have risen from 3.45 percent to 3.88 percent in the wake of the truckers' strike.

However, this is still within the central bank's target range, which centers on 4.5 percent, with a 1.5 percent margin to each side.

While inflation is under control, "there is greater pressure on prices from the truckers' strike that should end up being reflected in the inflation numbers," said Marcelo Caparoz from RC Consultores.