Brazil Central Bank Keeps Rate Cut Pace as Uncertainty Looms

(Bloomberg) -- Brazil's central bank kept the pace of monetary easing and signaled future rate cuts may not be as aggressive amid a fresh political crisis that has rocked the country.

The bank's board led by President Ilan Goldfajn reduced the benchmark Selic rate by a full percentage point to 10.25 percent on Wednesday, as forecast by 43 of 47 analysts surveyed by Bloomberg. Three economists estimated a 75 basis-point cut, and one expected a 125 basis-point reduction.

"The Committee judges that the recent increase in the uncertainty regarding the evolution of reforms and adjustments in the economy hampers a more timely reduction of estimates of the structural interest rate, and makes them more uncertain," policy makers wrote in the statement accompanying the decision. They added that a moderate reduction of the pace of monetary easing is "likely to be appropriate" at its next meeting in July.

Brazilian markets sold off earlier this month as President Michel Temer was dragged into a corruption scandal that threatens to stall his reform agenda in Congress. The political turmoil poured cold water on market bets that the central bank would accelerate the pace of rate cuts in response to a sharp inflation slowdown. Policy makers have now shaved 400 basis points off the key rate since last October as they try to pull Latin America's largest economy out of its worst recession on record.

"It's the Copom of uncertainty," said Tony Volpon, the chief economist at UBS Brazil and a former central bank director. He noted that the bank used the word "uncertainty" repeatedly in its communique accompanying the decision. "I can only conclude that this probably signals a moderate reduction at the next Copom meeting. That suggests 75 basis points, or maybe even less."

While Finance Minister Henrique Meirelles says gross domestic product resumed growing in the first quarter, banks including Goldman Sachs and Itau Unibanco have warned that failure to approve reforms could hinder efforts to lower borrowing costs more aggressively and plunge the economy back into recession later in the year. Official GDP data for the first three months of 2017 will be released Thursday.

Meanwhile, inflation in the 12 months through mid-May slowed to 3.77 percent, below the official target of 4.5 percent and its slowest pace in almost 10 years. Analysts surveyed by the central bank expect the economy to grow just 0.49 percent this year after contracting 3.6 percent and 3.8 percent in 2016 and 2015, respectively.

--With assistance from Bruce Douglas and Rafael Gayol

To contact the reporter on this story: Mario Sergio Lima in Brasilia Newsroom at mlima11@bloomberg.net.

To contact the editors responsible for this story: Vivianne Rodrigues at vrodrigues3@bloomberg.net, Matthew Malinowski, Bruce Douglas