Brazil’s central bank cuts key rate to 10.25%

Brazil’s central bank on Wednesday slashed the key interest rate by one percentage point to 10.25 per cent, continuing its pace of cuts amid a political crisis that has sown uncertainty just as Latin America’s largest economy was seen as crawling back from its worst recession ever.

The decision of the monetary policy committee, Copom, was unanimous, after inflation fell to a near 10-year low below the official 4.5 per cent target.

The bank said in a statement that a set of indicators of economic activity released since their last meeting “remains consistent with stabilisation of the Brazilian economy” However, it warned of “high levels of uncertainty”, adding a “moderate reduction of the pace of monetary easing” would be “adequate”.

Indeed, political turmoil spurred by corruption allegations involving Brazil’s president, Michel Temer, broke off less than two weeks ago, sending markets plunging and clouding expectations of a sharper cut. Before the furore, analysts expected the bank would cut the Selic rate by 125 basis points.

“Before the recent political episodes the market perception was that there was going to be an acceleration in the pace of the cuts,” said Silvio Campos Neto, senior economist with Tendências consultancy. “But the political events generated uncertainties, turbulence, so what happened today was expected.”

Brazil’s capital markets and currency have now rebounded, after an initial shock fuelled by the release of a recording secretly taped by the former chairman of meatpacker JBS, who allegedly discussed bribes with Mr Temer. However, speculation abounds that the government could fall, derailing crucial reforms.

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Mr Temer has denied any wrongdoing. But investors and economists have expressed concerns over whether his benighted government would be able to push through congress an unpopular overhaul of Brazil’s generous pension system. This is seen as key to plug in a budget deficit of 9.2 per cent of GDP.

Dismissing widespread calls for his resignation, Mr Temer said earlier this week in São Paulo that “we will arrive at the end of 2018 with the house in order.” Finance minister Henrique Meirelles said this week the economy likely grew by 0.7 per cent in the first quarter, but it probably slowed in the second quarter.

Brazil’s macroeconomic data will be released on Thursday morning.