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Brazilian central bank slashes interest rate, citing Trump-related global uncertainties

The central bank of Brazil has slashed interest rates in the monetary policy meeting held Wednesday, as was widely expected by market participants, citing US President-elect Trump-related global uncertainties that are likely to pose serious threats despite improving inflation and a gradual economic recovery.

The central bank board, led by President Ilan Goldfajn, cut the benchmark Selic rate by a quarter-point for the second straight meeting to 13.75 percent. The reduction was expected by 46 of 53 analysts surveyed by Bloomberg, and seven forecast a half-point cut.

"Regarding the external environment, the outlook is especially uncertain. The increase of asset price volatility indicates the possibility of an end to the benign period for emerging markets," Bloomberg reported, citing the board’s statement accompanying its decision.

Inflation has been slowing and the annual rate of 7.87 percent in October was the lowest level in over a year and a half. Market expectations for next year have also fallen, to 4.93 percent, according to a central bank survey of economists published this week.

Market participants are anticipating the economy to shrink 3.49 percent this year after a 3.77 percent drop in 2015, according to the central bank survey. Services inflation remained more resilient than expected at 0.42 percent in the month through mid-November, compared with 0.26 percent for the overall inflation index.

All the factors taken together, with uncertainties over Trump’s administration and the approval of fiscal adjustment measures in Brazil’s Congress suggested that at this point the quarter-point cut was the right decision.

Meanwhile, the dollar index has formed a bullish '4-price doji' pattern at 3.40, up 0.73 percent.

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