Brazil's Central Bank Cuts Benchmark Rate to Record Low 7% -- Update

By Paulo Trevisani and Luciana Magalhães Features Dow Jones Newswires

BRASÍLIA -- Brazil's central bank cut its benchmark interest rate to a record low Wednesday as subdued inflation allowed policy makers to focus on shoring up the economy after an unexpected slowdown in the third quarter.

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The bank lowered its Selic rate by half a percentage point to 7%, the lowest level since it was created in 1999. The cut was in line with market expectations and marked the bank's 10th straight reduction in interest rates since October 2016, when the Selic stood at 14.25%.

In a postmeeting statement, the bank said a "moderate reduction of the pace of easing [is] appropriate," in a sign it could continue lowering interest rates when the monetary policy committee convenes again in February.

"Markets will probably open tomorrow pricing a 0.25 percentage point cut, " said Bruno Foresti, a forex manager at Ourinvest bank. "There isn't room for larger cuts."

Wednesday's rate cut comes as both inflation and economic growth remain lower than policy makers would like as Brazil dodders out of its longest recession on record.

The consumer-price index rose just 2.7% in the 12 months through October, below the central bank's 3% to 6% target range. At the same time, gross domestic product grew just 0.1% in the third quarter, reinforcing fears that Brazil's recovery from its historic 2015-16 recession could be a sluggish one.

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"There is room to increase production and meet higher demand without inflation," said Raphael Figueredo, an analyst from Eleven Financial Research. "Slack is still very large."

But sizable risks remain in a nation gearing up for general elections next October amid a tumultuous political environment.

Brazil's Congress is struggling to pass a bill aimed at fixing Brazil's insolvent pension system, which has caused the national debt to balloon in recent years. President Michel Temer, who proposed the overhaul last year, spent months fighting corruption-related charges from prosecutors, which drained his political capital.

"Frustration of expectations regarding the continuation of reforms and necessary adjustments in the Brazilian economy may affect risk premia and increase the path for inflation," the central bank said in the postmeeting statement.

The Lower House is expected to put the overhaul to a vote next week after months of delays. If it doesn't happen, analysts say the task of fixing social security likely would be pushed back to 2019 at the earliest.

So far, investors have been giving Mr. Temer the benefit of the doubt. Brazil's currency has been stable for most of the year, contributing to benign inflation and allowing central bankers to focus on rekindling growth.

But Alexandre Schwartsman, an economist and former central bank official, said that could change if investors begin to sense prospects for social security reform dwindle further under the next administration.

"There is a risk the next administration won't pursue the reform," he said. "That would signal further government debt expansion and weaken the currency."

Write to Paulo Trevisani at paulo.trevisani@wsj.com and Luciana Magalhães at luciana.magalhaes@wsj.com

(END) Dow Jones Newswires

December 06, 2017 16:19 ET (21:19 GMT)