its quarterly inflation report released on Thursday, the bank
lowered its growth forecast to 0.8 percent from 1.3 percent for
2017. It kept its inflation baseline forecasts at 4.4 percent
for 2017 and 3.6 percent for 2018, below the official target of
A sharp drop in prices and contracting activity are expected to
prompt the central bank to opt for a 50 basis-point cut at its
next meeting, on Jan. 11, after two consecutive reductions of 25
basis points each. Some economists have already started to price
in an even heftier cut of 75 basis points.
"The bank is signaling it has space to increase the size of the
rate cut," said Alessandra Ribeiro, economist and partner with
Sao Paulo-based consultancy Tendencias. "However, I saw no signs
that it will be overly aggressive because the bank continues to
point to risks and calls for caution."
In its report, the bank said the economy, which is entering its
third year of recession, would further slow inflation that
earlier this year surged to double digits. The bank now expects
inflation to end 2016 at 6.5 percent.
The bank also said anchored inflation expectations allowed
policymakers to account for the costs of disinflation in its
monetary policy decisions.
"The magnitude of monetary easing and the speeding up of its
pace will depend on inflation forecasts and expectations," the
bank said, repeating the language used in the minutes of its
last rate-setting meeting.
At 13.75 percent, the central bank's benchmark Selic interest
rate remains one of the highest reference rates at a time when
doubts remain over the strength of the global economy.
President Michel Temer, who formally took office in August after
the impeachment of his predecessor, is under growing pressure to
pull the economy out of recession.
Analysts say Temer will probably rely on interest rate cuts to
breathe new life into the economy as growing political
turbulence and depleted state coffers limit his ability to
(Reporting by Silvio Cascione and Alonso Soto; Editing by Robin
Pomeroy and Lisa Von Ahn)
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