Lower pension costs could drive Brazil rates to record lows -economists

By Luiz Gerbelli and Claudia Violante

SÃO PAULO, March 16 (Reuters) - Interest rates in Brazil could drop to record lows as soon as next year if inflation keeps slowing and Congress passes fiscal austerity measures, providing relief for a nation struggling to emerge from recession, some economists said.

While record-low rates are not yet a majority view, an increasing number of economists have started to consider that possibility, provided President Michel Temer gets congressional approval of a pension cost cuts this year to plug a widening budget gap.

Passage is far from assured, however, since the measure would set a minimum retirement age for the first time and reduce payouts in one of the world's most generous pension systems.

Brazil’s benchmark interest rate of 12.25 percent is far above an all-time low of 7.25 percent set between October 2012 and April 2013.

A weekly central bank survey of more than 100 economists shows expectations that policymakers will accelerate the pace of cuts at their next meeting in April and drive rates down to an average 8.75 percent by the end of 2018.

Itaú Unibanco Holding SA economist Felipe Salles said he expected interest rates to fall to 8.25 percent by then, although he did not rule out a drop to as low as 7.25 percent.

With inflation expectations anchored and high unemployment because of Brazil's harshest recession ever, "the passage of the pension reform should help rates go to single digits and stay there for a long time," Salles added.

Some economists already have record-low rates as their likeliest scenario for 2019 and 2020, according to the weekly survey.

The lowest forecasts for Brazil's benchmark Selic rate are 7 percent for 2019, two percentage points below the consensus forecast, and 6.50 percent for 2020, versus a consensus view of 8.75 percent, according to the survey.

"We are optimistic about monetary policy," said BNP Paribas SA economist Gustavo Arruda. "Inflation is reacting well, and we would not be surprised to see interest rates going below 8 percent."

Inflation has fallen rapidly, in part because of the severity of Brazil's recession.

Price rises have undershot market expectations for seven straight months, according to Reuters polls. As a result, most economists expect the government to reduce its inflation target later this year for the first time in more than a decade.

The approval of new pension laws is a crucial condition for that scenario, economists say, because it would assuage investors' fears over a potential debt crisis.

However, workers unions and some lawmakers from Temer's coalition have demanded changes to the proposal, which Temer hopes will pass later this year.

"If Congress does not approve (the plan), there will be a significant reversal in the Selic rate this year," said economist José Márcio Camargo of asset management firm Opus Gestão de Recursos. "Reforms are a necessary condition for a continued drop in interest rates." (Writing by Silvio Cascione; Editing by Lisa Von Ahn)