By Paulo Trevisani
BRASÍLIA -- Brazil's central bank opted for a quarter-point cut to its benchmark interest rate Wednesday, as expected, as the country's political turbulence and uncertainties stemming from the U.S. election forestalled a bigger cut.
The bank trimmed its Selic rate to 13.75% from 14%. The move follows a quarter-point reduction in October that was the first cut in four years.
Before Donald Trump's surprise win in the U.S. presidential election Nov. 8, many economists said they expected a half-point rate cut at Wednesday's monetary policy committee meeting because of Brazil's slowing inflation and weak economy.
Expectations that the U.S. Federal Reserve could accelerate rate increases under the Trump administration appear to have overcome slowing inflation and concerns about a lingering recession at home, according to Renato Nobile, from BullMark Financial Group.
"It's a very complex moment," he said. "There's room for deeper cuts with the recession, but politics are again influencing the economy."
The central bank launched the easing cycle in October as inflation continued to slow after hitting 10.7% in January, more than double the bank's 4.5% target. Price increases slowed to 7.9% in October from a year earlier, the slowest pace since February 2015.
The country's deepest recession since at least the 1930s, with gross domestic product shrinking 3.8% in 2015 and set to contract 3.5% this year, also favored a rate cut.
The economic bad news continued Wednesday, when Brazil's statistic agency said GDP contracted 0.8% in the third quarter from the second, after falling 0.4% in the second quarter.
Government efforts to rein in spending were another factor in favor of monetary easing. The national budget deficit is near 9% of GDP, while gross debt reached 70.3% of GDP in October.
The fiscal imbalance is seen by the bank as increasing pressure on prices, as it adds demand to the overall economy and scares away investors, weakening the currency.
President Michel Temer is trying to push a bill to limit spending through Congress, which central-bank officials have identified as an early sign of fiscal prudence. Late Tuesday, the proposed amendment to the constitution was approved in the first of two rounds of voting in the Senate. If the Senate passes the bill again in a vote expected on Dec. 13, it will go to the president to be signed into law.
These factors initially led economists surveyed weekly by the central bank to forecast a rate cut to 13.5% this month.But Mr. Trump's win raised fears about U.S. protectionism and proposed economic stimulus measures that could lead the Fed to raise rates faster than previously expected, which likely would shift to the U.S. money now flowing to riskier, but higher-yielding emerging-market investments.
"The result of the American election is another element of uncertainty," central-bank President Ilan Goldfajn said in a conference to businesspeople earlier this month.
Domestic politics aren't helping, either. Suspicions of corruption that have plagued the political establishment for years flared up again over the past couple of weeks, raising doubts about Mr. Temer's ability to get economic overhauls approved in Congress.
Write to Paulo Trevisani at email@example.com
(END) Dow Jones Newswires
November 30, 2016 15:44 ET (20:44 GMT)
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