Brazil’s central bank cut interest rates to an all-time low on Wednesday and hinted at another, smaller reduction in February, but urged caution as major fiscal reforms hung in the balance.
The bank’s nine-member monetary policy committee, known as Copom, cut the benchmark Selic rate by 50 basis points to 7.00 percent, capping a 725 basis-point decline since October 2016. The move was widely expected by economists in a Reuters poll.
In a statement announcing the decision, the bank said it could make another, smaller rate cut at its next meeting in February, reinforcing expectations of a 25 basis-point reduction as the end of the rate-cutting cycle draws near.
Still, the Copom “views this guidance as more susceptible to changes in its baseline scenario and balance of risks than in previous meetings,” it said in the statement. “Going forward, the Committee judges that the current stage of the cycle recommends caution in conducting monetary policy.”
The remarks highlighted uncertainty about Brazil’s gradual economic recovery as the government struggles to pass austerity measures and inflation remains stubbornly below an official target.
Lawmakers have resisted an overhaul of Brazil’s bloated social security system, though the government’s coalition in the lower house of Congress expected a vote on the legislation by Tuesday. Ratings agencies have said the bill is key to determining the country’s sovereign credit rating.
“Our reading is that policymakers are waiting to see if the government manages to pass pension reforms ahead of the Christmas break,” Capital Economics chief emerging markets economist Neil Shearing wrote in a report. “If it does, a final 25 basis-point cut in the Selic seems likely. If it doesn‘t, today’s cut will probably be the last in the current cycle.”
Most economists surveyed by Reuters last week expected a 25 basis-point cut in February. A sizeable minority expected the bank to stand pat, while some bet on another 50 basis-point reduction.
Those forecasting further cuts cited mounting evidence that inflation will end the year below the bottom end of the official target range for the first time in two decades. Inflation expectations for 2018 are below the target’s midpoint.
Lower rates could help Latin America’s largest economy gain momentum after its deepest recession in decades and bolster a long-awaited rebound in corporate investments.