Brazil seen extending rate hikes even as economy stalls: Reuters poll

BRASILIA (Reuters) - Brazil's central bank will raise its benchmark interest rate by 50 basis points for a third straight time next week as inflation races far above the government's target, according to the vast majority of economists polled by Reuters.

Forty-three of 48 economists in the survey expect the central bank to raise its benchmark Selic rate on March 4 to 12.75 percent from 12.25 percent. The remaining five forecast a 25-point hike on worries that a bigger hike could further hurt Brazil's economy.

Policymakers have left both options on the table since last month's rate-setting meeting. But as inflation has so far failed to show any signs of abating, economists say the bank will have no choice but to raise rates sharply.

"The Selic needs to rise to at least 14 percent in coming months to prevent an even more permanent deterioration in the inflation outlook," Credit Suisse Securities economists wrote in a recent client note.

Twelve-month inflation is running at 7.14 percent, far above the government's 4.5 percent target. The central bank is working to lower inflation toward that goal in 2016, although economists only expect it to drop to 5.6 percent by the end of next year, according to a central bank poll.

As in its previous meeting, when it announced the rate decision through a terse statement with no clues on probable steps forward, the central bank is unlikely to provide any clear outlook, said Solange Srour, chief economist at BNY Mellon ARX in Rio de Janeiro.

Following next week's decision, policymakers could raise rates by a final 25 basis points in April, as most economists in the poll predict, or keep jacking up rates toward 13.75 percent, depending on whether the country's apparent recession is helping tame inflation.

"The economy will suffer a significant contraction. It is hard to say how much, but it should be enough to remove all the pressure we have seen in the past few years," said Vladimir Caramaschi, chief Brazil strategist at Credit Agricole.

Economists in the Reuters poll were split on whether Brazil will suffer a credit downgrade in the next two years, but most expect the country to keep its investment-grade rating.

Eight of fifteen said Brazil will undergo a downgrade by the end of next year. Eleven out of 14 do not expect Brazil's sovereign rating to fall to speculative status by 2018.

(Reporting by Silvio Cascione; Editing by Guillermo Parra-Bernal and Christian Plumb)