September 6, 2017 / 9:56 PM / 10 months ago

Brazil cuts rates to 8.25 percent, signals gradual end to easing

BRASILIA (Reuters) - Brazil’s central bank slashed interest rates to a four-year low on Wednesday to spur an incipient economic recovery, but said the pace of monetary easing would probably be reduced next month as policymakers prepared to gradually stop cutting rates.

People walk outside the central bank headquarters building in Brasilia, Brazil, September 6, 2017. REUTERS/Ueslei Marcelino

The bank’s nine-member monetary policy committee, known as Copom, cut its benchmark Selic rate BRCBMP=ECI by 100 basis points for a fourth straight time, to 8.25 percent. The decision was widely expected by economists in a Reuters poll.

With inflation holding near 18-year lows and far below the bottom of the central bank’s target range, policymakers have slashed borrowing costs since last October in hopes of pulling the economy out of its worst recession on record.

Interest rates, approaching a record low of 7.25 percent, are below neutral levels, the committee said.

That means they are already expected to sustain a gradual economic recovery, leaving the bank comfortable to make a first reference to a “gradual ending to the cycle” in the statement accompanying the decision.

“Provided the committee’s baseline scenario evolves as expected, and taking into account the stage of the monetary easing cycle, at this time Copom views a moderate reduction of the pace of easing as appropriate,” the committee said.

The bank revised up its inflation forecast for 2018 to 4.4 percent, from 4.3 percent at its previous meeting. The government’s target is 4.5 percent. In August, the official rate fell to an 18-year low of 2.46 percent.

Brazil has resumed growth in the first half of the year, but high unemployment and low usage of production capacity by most companies after the recession continue to keep prices under control. Bumper food crops have also curbed food inflation.

“The understanding of the market is that the bank is signaling a cut of 75 bps in the next meeting, followed by a 50 bps cut and then one of 25 bps that could be the last,” said Marco Caruso, an economist with Banco Pine in Sao Paulo.

“The bank seems to be comfortable signaling a reduction to at least 7 percent, with a possibility of going below 7 by the end of the cycle,” Caruso added.

Reporting by Silvio Cascione; Editing by Andrew Hay and James Dalgleish

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