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Brazil slashes rates, but signals dial down amid political storm

Published 05/31/2017, 05:38 PM
Updated 05/31/2017, 05:38 PM
© Reuters. The central bank headquarters building is seen in Brasilia

© Reuters. The central bank headquarters building is seen in Brasilia

By Alonso Soto and Silvio Cascione

BRASILIA (Reuters) - Brazil's central bank cut interest rates to a more than three-year low on Wednesday but said it was ready to dial down the pace of easing during a political crisis that threatens government efforts to plug a widening fiscal gap.

In a widely-expected move, the bank's COPOM monetary policy committee cut its benchmark Selic rate by 100 basis points for the second straight time to 10.25 percent. It was the Selic's lowest level since January 2014.

Corruption allegations against President Michel Temer, which threaten to unseat the center-right politician and derail his economic reform agenda, have tempered investors' initial bets for an even more aggressive monetary easing cycle as inflation drops sharply.

In its decision statement, the central bank said uncertainty generated by the crisis was the main risk facing the economy as it started to shows signs of recovery following two years of recession.

"The Copom judges that a moderate reduction of the pace of monetary easing relative to the pace adopted today is likely to be appropriate at its next meeting," the bank said in the statement.

© Reuters. The central bank headquarters building is seen in Brasilia

It added that doubts about the approval of key reforms, such as a pension system overhaul, were hampering a more timely reduction of the structural rate, which is the rate level that is neutral to inflation.

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