February 7, 2018 / 9:14 PM / 2 months ago

UPDATE 2-Brazil cuts rates to all-time low, signals end of easing

(Adds analyst comments, context throughout)

By Bruno Federowski

BRASILIA, Feb 7 (Reuters) - Brazil’s central bank cut interest rates to an all-time low on Wednesday and suggested it had reached the end of its deepest easing cycle in a decade as an economic recovery gathered pace.

The bank’s monetary policy committee, known as Copom, cut the benchmark Selic rate by 25 basis points to 6.75 percent, capping a 750 basis-point decline since October 2016.

The cut, widely expected by economists polled by Reuters, came despite a selloff in global stock markets as a jump in U.S. wages raised questions about the pace of rate hikes there, sending shockwaves through developed and emerging markets.

In its policy statement, the bank said the global outlook remained beneficial to emerging-market economies in spite of recent volatility. Still, it acknowledged that continued risk-aversion could drive up inflation.

“I think it was smart of the central bank not to overreact,” Banco Pine chief economist Marco Caruso said. “Investors seem more concerned with prices themselves, but the macro outlook is fine, thank you very much.”

The bank suggested it would likely keep rates low for a considerable period, or even pursue additional cuts if inflation rises too slowly after ending last year beneath the bottom end of its target range.

“Regarding the next meeting, provided the Committee’s baseline scenario evolves as expected, at this time the Copom views the interruption of the monetary easing process as more appropriate,” the statement said.

“This view regarding the next Copom meeting might change in favor of an additional moderate monetary easing, if the Committee’s baseline scenario or balance of risks change.”

Brazil’s inflation rate has hovered stubbornly below the official goal for months after an extended bout of food deflation. With the unemployment rate in double digits and companies sitting on idle capacity, upward pressure on prices looks likely to remain limited.

Most economists polled by Reuters last week expected the bank to stand pat at its next meeting, in March, and keep the Selic at 6.75 percent until at least early 2019.

All of those surveyed agreed, however, that the bank could be rushed to tighten policy if it seems that the winner of this year’s presidential elections, the most wide-open in decades, plans to roll back President Michel Temer’s austerity platform.

Temer has struggled to gather support in Congress for a bill cutting social security spending, which would add to the burden on his successor to curb a growing budget deficit. (Reporting by Bruno Federowski; Editing by Rosalba O’Brien and Diane Craft)

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