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Brazil's central bank cuts key rate to 11.25 percent

© AFP/File | Brazil's Central Bank is seen during a protest in Sao Paulo on June 7, 2016

BRASÍLIA (AFP) - 

Brazil's Central Bank cut the key interest rate by one percentage point on Wednesday in an accelerating strategy of trying to inject life into the floundering economy.

This was the fifth straight cut, taking the key Selic rate to 11.25 percent.

"The evidence suggests a gradual resumption of (economic) activity," the bank said in a statement.

In February, the bank made a 0.75 percent cut but falling inflation has created even greater leeway to stimulate the economy, market analysts say.

Brazil is into its third year of recession and although it is forecast to return to weak growth later this year, unemployment is at more than 13 percent, meaning few Brazilians are feeling the effects of the reported recovery.

Rate cuts began last October, starting from a high of 14.25 percent, and Wednesday's cut was the biggest so far.

"Inflation is on a benign trajectory and this opens the door to a cut," Luis Pereira, strategy analyst at Guide Investimentos, told AFP.

"However, economic activity continues to be very weak and the bank needs to pay attention to the labor market which has deteriorated more rapidly than expected."

Analysts say that the Selic is likely to fall as low as 8.5 percent by the end of this year, then likely stay there next year until presidential elections are held.

What the bank hopes is that "people and businesses will have less incentive to save and this will increase the tendency of capital to funnel into investment and consumption and to increase activity," said economist Wellington Ramos at Austin Rating.

"It's clear that activity is low and the recovery is very gradual, but since inflation is not a risk now there are a lot of arguments for a more aggressive rate cut," Ramos said.

In April, Brazil registered its lowest quarterly inflation since 1994 at 0.96 percent. Annual inflation is currently 4.57 percent.

Analysts expect inflation to end at 4.09 percent this year, under the official target of 4.5 percent.

The economy, however, remains stubbornly stuck in the country's worst recession on record.

Gross domestic product shrank 3.6 percent last year and 3.8 percent in 2015. In March, the government lowered its forecast for this year to annual growth of just 0.5 percent, down from one percent.

© 2017 AFP