Brazil's key rate brought down to record low

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Thursday, December 7, 2017

The Brazilian central bank reduced the country's benchmark interest rate, the Selic, to its lowest level ever and linked its next monetary policy move to the approval of pension reform.

The monetary policy committee, or Copom as it is known, cut the Selic by 50 basis points to 7%, which was in line with expectations.

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The Copom suggested that future reductions of the base rate will depend on the advance of pension reform, considered crucial to cut government debt and spending in the long term.

"Copom emphasizes that the evolution of reforms and necessary adjustments in the Brazilian economy contributes to the reduction of its structural interest rate. The committee will continue to reassess estimates of this rate over time," it said in a statement.

The sweeping pension reform proposal is highly unpopular with the general public and the government has been struggling to secure the necessary support in the lower house to make a vote possible. Failure to approve it this year could put the reform at risk since 2018 is an election year.

The previous lowest Selic level was seen during 2012-2013, when the rate was at 7.25%. The government at the time was seeking to revive the economy by making the cost of credit cheaper to the general public.

Economists see the reduction of interest rates as more sustainable this time around since inflation is now under control.

In the 12 months through mid-November, the most recent figure available, inflation was 2.77% and well below the central bank's target of 4.5%.

"Copom sees the baseline macro scenario as compatible with a 25bp rate cut in February, but is at the same time forewarning that the degree of conviction about the current guidance is much weaker than in previous occasions, particularly given the fact that after 725bp in rate cuts the current monetary easing cycle is already quite long in the tooth," said Alberto Ramos, an economist at Goldman Sachs.

The Copom's next monetary policy meeting is in February and the option of not cutting at all at that meeting is now also an option, Ramos added.