April 12, 2017 / 5:14 AM / 4 months ago

Brazil makes biggest rate cut since 2009 to fire up economy

A view of Brazil's Central Bank in Brasilia, Brazil, September 15, 2016. Picture taken September 15, 2016.Adriano Machado

BRASILIA (Reuters) - Brazil's central bank made its deepest cut to interest in nearly eight years on Wednesday and signaled it might continue its aggressive easing to revive an economy still reeling from its deepest recession ever.

In a unanimous vote, the central bank's 9-member monetary policy committee, known as Copom, decided to reduce its benchmark Selic rate by 100 basis points to 11.25 percent, its lowest level in nearly two years. That marked the biggest reduction since June of 2009 and followed cuts at the last four meetings.

President Michel Temer celebrated the move on Twitter, but a new corruption investigation into a third of his cabinet has the potential to derail his austerity reforms and limit the scope of further interest rate cuts.

Despite calls from some politicians and business leaders for the central bank to be even more aggressive, the committee suggested it would keep up the current pace of rate cuts for now.

"The committee considers the current pace of easing to be appropriate; however, the current economic context calls for monitoring the developments of the determinants of the degree of frontloading of the cycle," the bank said in its decision statement.

Some analysts, however, believe the bank may have to opt for an even bigger rate cut in the future if inflation continued to surprise on the upside and the economy remained sluggish.

"The bank is saying the pace is appropriate at this moment, but they left the door half-open to eventually intensify the pace of rate cuts," said Alberto Ramos, an economist with Goldman Sachs, adding that he expected two more rate cuts of 100 basis points each.

Brazil's Central Bank President Ilan Goldfajn, speaks during a news conference in Brasilia, Brazil March 31, 2017.Ueslei Marcelino

The bank raised its 2017 inflation forecast in a market scenario to 4.1 percent from 4.0 percent in its quarterly inflation report, but kept its 2018 inflation forecast at 4.5 percent.

A weak recovery after two years of recession has slowed inflation and raised pressure on Temer to pass reforms to rebalance public accounts and bring back investors.

Eight of his ministers were placed under investigation on Tuesday, casting doubts about Temer's ability to approve a landmark pension reform, a process likely to dictate the pace of future rate cuts.

For the first time the central bank highlighted the approval of the reforms as a risk to inflation, suggesting a failure to approve the pension proposal could limit the scale of its easing cycle.

In a telephone interview with Reuters earlier on Wednesday, Finance Minister Henrique Meirelles acknowledged the approval of the reform could be delayed until August.

Brazil's economy has contracted nearly 8 percent in two years, driving consumer inflation to the 4.5 percent mid-point of the official target after reaching double digits in 2016.

Inflation expectations have also eased dramatically, convincing Temer it was time to reduce the inflation target for 2019 to bolster his administration's credibility.

Lower inflation has allowed central bank chief Ilan Goldfajn to concentrate on growth, with economists forecasting the Selic falling as low as 8.50 percent by the end of the year.

Reporting by Alonso Soto; Editing by Meredith Mazzilli and Andrew Hay

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