(Bloomberg) -- Brazil’s central bank cut its key interest rate by half a percentage point and promised to keep the same easing pace in the next few meetings, after inflation slowed within the tolerance range and new signs of a weakening economy emerged.
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The bank cut the benchmark Selic to 11.25% on Wednesday, as expected by all analysts surveyed by Bloomberg and in line with prior guidance from the monetary authority. Policymakers have now lowered borrowing costs by 2.5 percentage points since August.
“If the scenario evolves as expected, the Committee members unanimously anticipate further reductions of the same magnitude in the next meetings,” central bank board members wrote in a statement accompanying their decision. The bank considered the current pace as “appropriate to keep the necessary contractionary monetary policy for the disinflationary process.”
Central bankers led by Roberto Campos Neto are sticking with a gradual pace of monetary easing days after a report showed annual inflation slowed for a third straight month in early January, and much more than expected by economists. Most of them are trimming forecasts for price increases for this year as uncertainty clears and demand succumbs to tight financial conditions.
“The outlook is improving,” said Fernando Honorato, chief economist at Banco Bradesco SA, ahead of the decision. He sees inflation easing further in the second half of the year.
What Bloomberg Economics Says
“Brazil’s central bank avoided any surprises in its rate decision and tone of the post-meeting statement. Small changes to the communique illustrate the BCB’s dilemma this year — unanchored inflation expectations at home may keep policymakers from leveraging lower global rates to step up their easing pace. We see additional half-point cuts at the next two meetings before shifting to smaller cuts, with a year-end policy rate of 9%.”
— Adriana Dupita, Brazil & Argentina economist
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Read more: Brazil Inflation Slows Past All Estimates in Early January
The decision came after the Federal Reserve left rates unchanged and Chair Jerome Powell threw cold water on hopes that reductions would begin in March.
Brazil traders have almost entirely ruled out odds of steeper cuts given risks such as surging food prices and resilient services inflation. Adverse weather caused by El Nino is driving up costs of staple goods like potatoes and rice.
With unemployment at the lowest level since 2015 and wage negotiations often yielding real salary gains, closely-watched measures of inflation stripping out volatile items could plateau after months of slowing down.
Investors are also concerned by widening budget gaps amid pressure for greater spending from members of President Luiz Inacio Lula da Silva’s Workers’ Party. Finance Minister Fernando Haddad is negotiating ways to increase revenues and fulfill a promise of eliminating the primary fiscal deficit, which excludes interest payments.
Wednesday’s decision was the first for directors Paulo Picchetti and Rodrigo Teixeira. Four of the nine board members have now been appointed by Lula.
--With assistance from Giovanna Serafim.
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