World Economy

Brazil to Cut Interest Rate to Boost Economy

Brazil faces high unemployment, dwindling industrial output  and inflation at 8.48%.Brazil faces high unemployment, dwindling industrial output  and inflation at 8.48%.

Brazil’s central bank is poised to cut some of the world’s highest interest rates for the first time in four years on Wednesday, in an attempt to help Latin America’s No.1 economy emerge from its deepest recession in decades.

An overwhelming majority of analysts polled by Reuters last week expect the central bank to reduce its benchmark Selic rate from a 10-year high of 14.25%, but they are divided over the size of the cut, CNBC reported.

Economists are evenly split on whether the bank’s monetary policy committee, known as Copom, will trim the Selic by 25 or 50 basis points after keeping it unchanged for over a year.

“The Copom has been carefully paving the way for a rate cut,” economists with lender Itau Unibanco said in a research note, adding that they believed the bank would opt for a 0.25 percentage point reduction.

“In the statement, we expect the Copom to signal that its next steps will be data dependent.”

The yields of interest rate futures suggest a majority of traders are also betting on a reduction of 25 basis points.

A lower Selic would mark the start of a monetary easing cycle under the command of the bank’s new governor Ilan Goldfajn amid growing market optimism that the economy could have already left behind the worst of a two-year recession.

Inflation has retreated in recent months and the initial approval of a key austerity proposal in Congress has given Goldfajn enough arguments to trim one of the highest interest rates among G20 nations.

The recovery, however, remains tentative with high unemployment and dwindling industrial output. Inflation at 8.48% remains well above the 4.5% center of the official target.

Service activity dropped 3.9% in August from the same month last year, official data showed on Wednesday, a sharper fall than expected in the latest sign that the recovery could be slow.

Meanwhile, Switzerland has given Brazil access to the bank accounts of Brazilian politicians and executives at Petrobras that could shed light on allegations of corruption at the state oil group, the Swiss Office of the Attorney General said.

Switzerland’s highest court, the Swiss Federal Court, rejected a last appeal by some of those involved after a lower court had allowed the transfer of documents.

A Brazilian investigation into Petrobras has uncovered systemic corruption at multiple companies and at the highest levels of government. Allegations of bribes and political kickbacks in the case have triggered protests across Brazil.

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