Brazil’s Central Bank slashed its key interest rate this week by a full percentage point to 8.25%, the eighth consecutive cut as the country slowly exits a painful recession. The one percentage point fall in the base Selic rate had been predicted by markets and matched a previous cut in July.
The decision was announced hours after the government stats agency IBGE reported that inflation notched up only slightly in August, leaving the year-to-date inflation rate at 2.46%, the lowest in almost two decades.
Markets expect 3.38% price increases for this year, meaning the government will easily beat its target of 4.5% inflation. That’s light years from the 10.67% inflation in 2015 and 6.2% at the end of 2016.
The trend has freed the bank to relax rates and try to spur an economy only just starting to show signs of creeping out of its worst recession on record. The basic interest rates (Selic) has been lowered from 14.25% in October last year, with the pace of cuts accelerating.
Central Bank said the rhythm of rate cuts would slow and that “there will be a gradual end to the cycle.” Market expectations polled by the bank’s Focus weekly magazine point to the Selic ending the year at 7.25%.
Last week the government welcomed an unexpected fall in stubbornly high unemployment from 13 to 12.8%, although much of the growth was in low-quality jobs.
Center-right President Michel Temer, who is battling a criminal charge of corruption, is pushing austerity cuts, looser labor laws and a big privatization program that he says will revive the sickly economy after more than a decade of leftist rule.
In the first quarter of this year, gross domestic product rose 1%, ending eight consecutive quarters of shrinkage. There was a growth of 0.2% in the second quarter.
Analysts believe Brazil will wind up 2017 with 0.5% GDP growth, up from the 0.39% that had been forecast before the second quarter statistics came in last week. The consensus is that Latin America’s biggest economy will climb back to 2% growth in 2018.