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Brazil likely to avoid hefty rate cut amid market uncertainty
November 30, 2016 / 6:05 AM / a year ago

Brazil likely to avoid hefty rate cut amid market uncertainty

BRASILIA, Nov 30 (Reuters) - Brazil’s central bank is widely expected to keep its moderate pace of interest rate cuts on Wednesday due to growing political and market uncertainty clouding the path to recovery from a grueling two-year recession.

A faltering economy has raised pressure on the bank to keep easing policy, but market turmoil triggered by the election of Donald Trump to the White House and a political scandal at home have investors betting on caution.

Fifty-four out of 64 analysts surveyed by Reuters until Tuesday believe the bank will cut its benchmark Selic rate by another 25 basis points to 13.75 percent, its lowest in over a year. The remainder forecast a rate cut of 50 basis points.

Trump’s surprise victory on Nov. 8 has dragged down the Brazilian currency by more than 7 percent on expectations his promises for fiscal stimulus could raise U.S. interest rates and spark a flight of capital from riskier markets. A weaker exchange rate raises pressure on inflation that, despite a recent slowdown, remains well above the 4.5 percent official target.

More recently an ethics scandal within President Michel Temer’s cabinet has raised fears he could lose support in Congress to push ahead austerity reforms key to allow the central bank to keep lowering some of the world’s highest interest rates.

“At this moment, the board will most likely opt for a more cautious decision taking into consideration the uncertain outlook of the global economy,” analysts with Banco Fibra wrote in a research note.

Still, many analysts predicted the bank would step up monetary easing at its next meeting in January as activity continues to disappoint in what could be the country’s worst recession on record.

Initial hopes of a faster recovery from the recession after the impeachment of leftist President Dilma Rousseff have fizzled with unemployment on the rise and industrial output down.

Official data on Wednesday is likely to show that the economy shrank 0.8 percent in the third quarter, according to a Reuters poll, its seventh straight quarterly contraction.

The government last week cut its 2017 growth estimate to 1 percent from 1.6 percent, but some analysts are predicting stagnation next year with lingering doubts over the administration’s capacity to shore up its depleted public accounts. (Reporting by Alonso Soto; Editing by Meredith Mazzilli)

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