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Brazil signals record low rates with slower cuts ahead

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10/26/2017 | 12:13am CET
FILE PHOTO: A Volkswagen logo is seen at Serramonte Volkswagen in Colma, California

Brazil's central bank slowed the pace of monetary easing on Wednesday but signaled it remained likely to cut interest rates to a record low next month, as policymakers seek to boost an incipient economic recovery with inflation under control.

The bank's nine-member monetary policy committee, known as Copom, cut the benchmark Selic rate by 75 basis points to 7.50 percent, after four consecutive cuts of 100 basis points. The decision was widely expected by economists polled by Reuters.

The bank repeated language from its previous meeting recommending a moderate reduction in the pace of easing going forward, leading analysts to predict a 50-point cut in December. That would take the Selic rate to a record low of 7.0 percent.

Guidance for early 2018 nevertheless remained up in the air. Economists diverged about the potential meaning of the bank's decision to remove a reference to a gradual end to rate cuts from the post-meeting statement.

"The doors appear open for an additional cut by the following meeting, in February," JPMorgan economists wrote in a report forecasting the Selic rate would fall to 6.5 percent in early 2018. Others, such as UBS economist Fabio Ramos, said the statement backs up the view that the December cut will be the last in the current cycle.

The Selic rate has fallen from 14.25 percent just a year ago. Since then, Brazil's economy has resumed growth after two years of deep recession in 2015 and 2016 that shed nearly 3 million jobs and left huge idle industrial capacity.

Inflation has plunged from double-digits to less than 3 percent, far below the official target of 4.5 percent, and is forecast by the central bank to stay around the goal through the end of 2019.

"Whether the bank cuts the Selic below 7 percent will depend on the short-term outlook, which seems relatively benign from our standpoint," said Luciano Sobral, an economist with Santander Brasil.

(Reporting by Silvio Cascione; Editing by Chizu Nomiyama and Sandra Maler)

By Silvio Cascione and Bruno Federowski

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