Brazil opts for moderate rate cut despite deepening recession

November 30, 2016 1:04 AM EST

A view of Brazil's Central Bank in Brasilia, Brazil, September 15, 2016. REUTERS/Adriano Machado/File Photo


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By Alonso Soto and Silvio Cascione

BRASILIA (Reuters) - Brazil's central bank cut interest rates by 25 basis points on Wednesday, maintaining a slow pace of monetary easing despite a sharp economic contraction in the third quarter that suggested a grueling recession could stretch into a third year.

The central bank resisted pressure for a hefty rate cut even after data released earlier on Wednesday confirmed fears the once-booming emerging market is struggling to pull out of its worst recession in memory.

The bank's monetary policy committee, known as Copom, voted unanimously to lower its benchmark Selic rate to 13.75 percent amid growing uncertainty.

In a statement on its decision, the bank stressed that growing uncertainty over U.S. economic policies after the Nov. 8 election of Donald Trump as president could end a favorable period for emerging markets that saw strong inflows of foreign capital.

"The possible end of the benign interregnum for emerging economies may hinder the process of disinflation," said the bank, which pointed to that as one of the three main risks to meeting its inflation target.

Still, the bank said that a "gradual" easing cycle was compatible with bringing inflation back to the 4.5 percent target in 2017 and 2018.

A slowdown in inflation that earlier this year surged to double digits and a faltering economy will likely force policymakers to accelerate the loosening cycle at its next meeting in January, analysts said.

Economic output shrank 0.8 percent in the third quarter from the second, statistics agency IBGE said on Wednesday. There were no bright spots as investments dropped sharply, farmers, manufacturers and service providers all reduced production, and families and government agencies consumed less.

(Additiobal reporting by Camila Moreira; Editing by Chizu Nomiyama and Jonathan Oatis)



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