December 6, 2016 / 11:32 AM / 2 years ago

UPDATE 2-Slow Brazilian recovery could mean bigger rate cuts -central bank

(Adds analyst comments and details of political gridlock)

By Alonso Soto and Silvio Cascione

BRASILIA, Dec 6 (Reuters) - Fears of a slower economic recovery in Brazil could pave the way for heftier rate cuts, the central bank said on Tuesday, clearly signalling more aggressive monetary easing ahead as the country’s worst recession in memory worsens.

Last week, the bank cut its benchmark Selic rate by 25 basis points to 13.75 percent, maintaining the slow pace of rate cuts to secure inflation eases to the 4.5 percent of the official target next year.

In the minutes of that meeting, the bank said some members argued for a more aggressive rate cut given the slowdown in inflation and advances in approving fiscal measures in Congress.

All members, however, agreed that the recovery has disappointed as the recession threatens to stretch into a third year.

“The palpable risk that a timely recovery of activity does not materialize should allow for the intensification of the pace of monetary easing,” the bank added.

By acknowledging that the economy could take longer to recover the central bank clearly signalled a heftier rate cut is warranted at its Jan 11 meeting.

The minutes “were even more dovish than the (already dovish, in our view) post-meeting communique, strengthening our view that the bank is inclined to increasing the cutting pace to 50 basis points in January,” Nomura analyst Joao Pedro Ribeiro wrote in a note.

“Risks to the size of the overall rate-cutting cycle remain tied to the government’s ability to promote fiscal reform,” he added.

President Michel Temer’s initial success in move ahead with his austerity agenda could be threatened by the surprise removal of the speaker of the senate on Monday.

The Supreme Court on Monday removed speaker Renan Calheiros after he was indicted on charges of embezzlement, leaving the presidency of the upper house in the hands of the opposition, which has threatened to delay the second-round vote of the spending cap until next year. (Reporting by Alonso Soto and Silvio Cascione; Editing by Andrew Heavens and Diane Craft)

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