Brazil Central Bank Cuts Selic Rate to 8.25% -- 2nd Update

By Paulo Trevisani and Jeffrey T. Lewis Features Dow Jones Newswires

BRASÍLIA -- Brazil's central bank on Wednesday cut its benchmark lending rate by a full percentage point as prices increased at the slowest pace in almost 20 years, and signaled a smaller rate cut at its next monetary policy meeting.

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The bank cut its key Selic rate from 9.25% to 8.25%, the lowest level since July 2013 and just 1 percentage point above its 2013 all-time low.

The bank also suggested that an end to the current round of rate-cuts is in sight.

The monetary policy committee sees "a moderate reduction of the pace of easing as appropriate," given the outlook for the economy, the bank said in the statement announcing the rate cut. "In addition, under those same circumstances, the (committee) foresees a gradual ending to the cycle."

The statement is a clear message to markets it will start to fade out rate cuts and may even go back to a small rise by late 2018, according to Roberto Padovani, economist at brokerage Votorantim.

"The strategy is to end the cycle with smaller cuts until the Selic reaches probably 7%, with the possibility of ending next year a little higher than that" he said.

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The idea, he said, would be to use low rates now to rekindle economic growth before tightening again to avoid inflation.

"It is a reasonable strategy," Mr. Padovani said.

Brazil suffered through its worst recession on record during 2015 and 2016, just as a giant corruption scandal and fierce political infighting made it almost impossible for the government to take effective measures to heal an economy wrecked by the end of a commodities boom.

Embattled President Michel Temer recently showed he has the support of enough lawmakers to get at least some of his market-friendly agenda of economic reforms approved. Last month Congress voted to shelve corruption charges that could have toppled Mr. Temer, an outcome that could have resulted in Brazil having as many as five presidents in less than three years.

Mr. Temer could potentially face more criminal charges, but on Monday prosecutors revealed flaws in a major plea-bargaining deal that spawned the shelved charges and had been expected to lead to more. The flaws could result in the cancellation of the plea deal and potentially help the president.

Mr. Temer "is getting stronger, and so is his reform agenda," said Ignácio Crespo from Guide Investimentos, a brokerage firm. "It's possible the reforms will speed up now that the accusations seem to have been weakened," he said.

The reforms include, among other things, a simplification of Brazil's byzantine tax code, an greater creditor protection in bankruptcy-recovery procedures and, most important, an overhaul of Brazil's generous but insolvent retirement system. Earlier this week Congress approved one of the president's cost-cutting proposals -- the reduction of subsidies for certain loans to businesses.

The central bank has repeatedly said the advance of such reforms is key to ensuring low interest rates in the long haul.

"Approving and implementing reforms [is] fundamental to achieving sustainable low inflation and for monetary policy to work well," the bank's economic policy director, Carlos Viana, said in a speech last month.

The streak of good news continued on Wednesday, when Brazil's statistics agency IBGE said consumer prices rose at a 2.46% annual rate in August, the slowest pace since 1999. Last week the agency said gross domestic product grew 0.3% in the second quarter of 2017 from a year earlier.

Economists surveyed weekly by the central bank forecast inflation at 3.45% by year-end and 0.5% GDP growth for 2017.

Write to Paulo Trevisani at paulo.trevisani@wsj.com and Jeffrey T. Lewis at jeffrey.lewis@wsj.com

(END) Dow Jones Newswires

September 06, 2017 18:31 ET (22:31 GMT)