(Bloomberg) -- Brazil maintained the pace of monetary easing on Wednesday as increased international volatility following Donald Trump's election offset improving inflation and a slower-than-expected recovery.
The central bank board, led by President Ilan Goldfajn, cut the benchmark Selic rate by a quarter-point for the second straight meeting to 13.75 percent. The reduction was expected by 46 of 53 analysts surveyed by Bloomberg, and seven forecast a half-point cut.
"Regarding the external environment, the outlook is especially uncertain. The increase of asset price volatility indicates the possibility of an end to the benign period for emerging markets," the board said in the statement accompanying its decision.
Brazil's central bank last month started its first easing cycle since 2012 after projecting it would hit the official 4.5 percent inflation target next year. Since then, the prospect of higher U.S. borrowing costs under Trump drove Brazil's currency lower and created a possible new source of consumer price pressure. Fresh uncertainty on the pace of domestic fiscal reforms and high service inflation also prompted policy makers to take heed, according to Barclays economist Bruno Rovai.
“There was no room to ease at a faster pace,” Rovai said in phone interview before the central bank decision. “All the factors taken together, with uncertainties over Trump's administration and the approval of fiscal adjustment measures in Brazil's Congress suggested that at this point the quarter-point cut was the right decision.”
Inflation Levels
To be sure, inflation has been slowing and the annual rate of 7.87 percent in October was the lowest level in over a year and a half. Market expectations for next year have also fallen, to 4.93 percent, according to a central bank survey of economists published this week.
That is due in large part to a recession that has smothered demand from indebted households and companies alike.
Analysts expect the economy to contract 3.49 percent this year after a 3.77 percent drop in 2015, according to the central bank survey. Earlier on Wednesday the national statistics institute reported that Brazil's gross domestic product contracted 0.8 percent in the third quarter, its fastest pace of decline this year.
Still, services inflation remained more resilient than expected at 0.42 percent in the month through mid-November, compared with 0.26 percent for the overall inflation index. Services inflation has remained high due to factors including indexation, which entails automatic price adjustments made in tandem with cost of living increases.
Political uncertainty
Services inflation isn't the only point of uncertainty on the central bank's radar. Brazil President Michel Temer was accused last week of influence-peddling by his former culture minister in a political scandal that included a recorded conversation of the president and culminated in the resignation of a key aide.
Local assets dropped as the news revived memories of the leaked tapes and testimonies that heightened political instability that culminated in the impeachment of President Dilma Rousseff in August.
While a bill limiting public spending passed in the Senate on Tuesday with 61 votes, 12 more than the minimum needed, Temer's administration is expected to face stiffer resistance to an upcoming pension overhaul. The central bank has repeatedly said the pace of easing hinges on factors including the implementation of fiscal reforms.
"The political environment deteriorated significantly in the last few days and the agenda for the last weeks of the year is not favorable," Banco Fator said in a research note before the bank's decision signed by chief economist Jose Francisco de Lima Goncalves.
The central bank will only have room to boost the pace of Selic cuts in upcoming months as the local inflation outlook improves and Trump's policies become clearer, according to Carlos Kawall, chief economist at Banco Safra.
“The central bank is aware of the economic slowdown, and once the uncertainties go down, I see the pace of rate cuts picking up starting in January,” Kawall said before the bank's decision.
--With assistance from Rafael Gayol and Robert Jameson 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, Raymond Colitt
Essential Business Intelligence, Sharp Market Insights, Practical Personal Finance Advice, Daily Fuel, Gold and Silver Prices and Latest Stories — On NDTV Profit.
