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By Lise Alves, Senior Contributing Reporter

SÃO PAULO, BRAZIL – The Central Bank of Brazil’s Monetary Policy Committee (COPOM) announced on Wednesday evening it was lowering its benchmark interest rate (Selic) by 0.75 percentage points. The Selic now stands at thirteen percent, the lowest level since April of 2015.

Brazil, Brasilia,Copom members decide on a 0.75 percentage point decrease for the country's benchmark interest rate,
COPOM members decide on a 0.75 percentage point decrease for the country’s benchmark interest rate, photo courtesy of Brazil’s Central Bank.

The unanimous decision by the COPOM surprised analysts, who were expecting between a 0.25 and 0.50 percentage point reduction. The decision comes a day after the 2017 budget, with the federal spending limit, is sanctioned.

“The set of indicators suggests lower than expected economic activity. The available evidence indicates that the recovery of economic activity should be even more time-consuming and gradual than previously anticipated,” said the statement issued by COPOM officials after the announcement.

Officials however went on to say that inflation has remained more favorable than expected and that last year’s accumulated inflation reached 6.3 percent, ‘well below that expected a few months ago and within the tolerance range of the target for inflation established for 2016’.

Although expecting a reduction in interest rates, economists were surprised. “[COPOM] dared and cut beyond what was expected. We were expecting a cut of 0.5 percentage points because of the signals given out by the Central Bank,” said Economics Professor at Insper and partner at Quatro E Consultancy, Juan Jensen, during a radio interview on CBN on Thursday morning.

As for the behavior of the Selic in the coming months, analysts predict that the COPOM will continue to be aggressive in its reductions. “This quicker pace will likely be maintained going forward as dampened consumption amid austerity measures, high unemployment and tight credit conditions continue to put downward pressure on prices,” senior economist Angela Bouzanis at FocusEconomics told The Rio Times.

She adds, “Moreover, the Bank will be looking to support economic activity, which is feeble. While incoming data points to stabilization, the road to recovery will be long.” The consultancy forecasts Brazil’s GDP growing a weak 0.8 percent this year.

The monetary authority’s decision comes a day after acting President, Rodrigo Maia, sanctioned the 2017 budget which calls for R$3.5 trillion in federal spending this year.

This is the first budget to fall within the rules of the new Constitutional Amendment, which establishes that federal spending will be limited to a ceiling of the previous year’s budget, adjusted by the inflation measured by the Consumer Price Index (IPCA).

The amendment approved in Congress last October will be valid for the next twenty years.

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