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Brazil cuts interest rate to record low seven percent

© AFP/File | With inflation stagnating, the government hopes to see the start of a recovery in spending to help nudge the economy further into growth

RIO DE JANEIRO (AFP) - 

Brazil's central bank cut the key interest rate Wednesday to a record low of seven percent, about half of what it was a year ago.

The 0.5 percentage point drop in the Selic rate reflected the strong fall in inflation as Brazil emerges from a two-year recession.

Back in October 2016, when the country's economy was still firmly in negative territory, the Selic was at 14.25 percent, with the bank fighting to dampen down any inflationary pressure.

From then, however, the bank embarked on the first of what are now 10 consecutive rate cuts, dropping under the 10 percent barrier in July for the first time in nearly four years.

Inflation is now considered a low risk. Prices were rising at 10.6 percent in 2015 and 6.2 percent in 2016, but only hit 2.7 percent over 12 months last October.

With that, the government hopes to see the start of a recovery in spending to help nudge the economy further into growth.

However, the future of Brazil's huge but troubled economy remains clouded by uncertainty over next year's presidential elections and continued wrangling over current President Michel Temer's austerity reforms.

The frontrunners for the 2018 election are so far leftist former president Luiz Inacio Lula da Silva and rightwing former army officer Jair Bolsonaro.

Neither man is much welcomed by investors, who have been pushing Temer to enact the unpopular austerity reforms, especially cuts to the pension system.

Temer argues the cuts are needed to bring reality to Brazil's unaffordable state budget.

© 2017 AFP