Brazil cuts interest rate to record low 7%

[RIO DE JANEIRO] Brazil's central bank on Wednesday cut the key interest rate to a record low of seven per cent, about half of what it was a year ago.

The 0.5 percentage point drop in the Selic rate reflected the strong fall in inflation as Brazil emerges from a two-year recession.

Back in October 2016, when the country's economy was still firmly in negative territory, the Selic was at 14.25 per cent, with the bank fighting to tamp down any inflationary pressure.

From then, however, the bank embarked on the first of what are now 10 consecutive rate cuts, dropping under the 10 per cent barrier in July for the first time in nearly four years.

Inflation is now considered a low risk. Prices were rising at 10.6 per cent in 2015 and 6.2 per cent in 2016, but only hit 2.7 per cent over 12 months last October.

With that, the government hopes to see the start of a recovery in spending to help nudge the economy further into growth.

President Michel Temer hailed the rate drop, in a video posted on social media.

"With lower interest rates, clearly it is easier to live, work, buy and find housing," he said.

"This lowers rates throughout the whole banking system," he added.

But the consultancy Gradual Investimentos insisted that "compared to other emerging economies, our rate is still quite high."

The future of Brazil's huge but troubled economy remains clouded by uncertainty over next year's presidential elections and continued wrangling over Mr Temer's austerity reforms.

The frontrunners for the 2018 election so far are leftist former president Luiz Inacio Lula da Silva and rightwing former army officer Jair Bolsonaro.

Neither man is much welcomed by investors, who have been pushing Mr Temer to enact the unpopular austerity reforms, especially cuts to the pension system.

Mr Temer argues the cuts are needed to bring reality to Brazil's unaffordable state budget.

AFP