SÃO PAULO--Brazil's central bank cut its key Selic lending rate to a record low Wednesday and left the door open for more cuts, as the outlook for inflation remains below target amid the impact of the coronavirus pandemic on the economy.
The bank's monetary policy committee trimmed the Selic to 2% from 2.25%, the ninth consecutive reduction. Any future cuts might take place with more time between changes amid greater-than-normal uncertainty about economic growth, the bank said in its statement.
"Due to prudential and financial stability reasons, the remaining space for monetary policy stimulus, if it exists, should be small," the bank said. "Possible future adjustments to the current degree of monetary stimulus would occur with additional gradualism."
Brazil's economy has already begun to recover from the steep drops in activity suffered in the first months of the pandemic, and economists have trimmed their forecasts for price increases and cut back how much they think gross domestic product will decline this year.
The median forecast in the central bank's weekly survey of economists is for the 12-month inflation rate to end the year at 1.63%, well below the bank's target of 4% for 2020 and below the 1.67% forecast in the previous week's survey. Economists see inflation ending next year at 3%, below the 3.75% target for 2021.
GDP will shrink 5.66% this year, compared with the forecast for a contraction of 5.77% a week earlier, and the economy will grow 3.5% next year, according to the survey.
The central bank is running out of time to lift inflation closer to the 2020 target, says economics professor Andre Diz, from São Paulo's Ibmec business school. That means the bank had to cut now, but another trim is unlikely this year given current uncertainties, as any impact would take months to be felt.
"By cutting now they can still hope for an impact on this year's inflation," Mr. Diz said, noting that GDP forecasts have improved a little. "I think another cut would only make sense if new data showed activity tumbling in the second half of the year."
Mr. Diz said a quarter of a percent was coherent with the bank's gradual approach to monetary policy during the pandemic. "It's better to cut gradually than to take leaps that will force you to revert in a hurry down the road."
The outlook for growth is still cloudy. The central bank's policy makers have said the government needs to get spending under control and keep up the pace of economic reforms for rates to stay low.
The government has programmed additional spending of about $100 billion since the start of the pandemic, including to provide income to the millions of Brazilians who work in the informal economy, such as cleaners and delivery people, who aren't helped by additional spending on unemployment insurance.
The central bank also has done its part by boosting liquidity in the financial system, easing credit terms, and making it easier for individuals and businesses to renegotiate their debts, among other things.
With the measures approved by the government, Brazil's national debt is expected to soar to 94.9% of GDP at the end of this year, from 75.8% at the end of 2019, according to a forecast by Fitch Group. That is likely to put pressure on prices in the next few years, according to Jason Vieira, chief economist at Infinity Asset in São Paulo.
"Fiscal problems now generate inflation problems in the future," he said.
Brazil's Congress approved a measure at the start of the pandemic to allow the government to exclude funding to battle the virus from a spending ceiling that has helped keep budgets under control, and many economists expect another waiver might be necessary next year.
"That would be worrisome," Mr. Vieira said.
But the government also is moving forward with the economic changes that began last year with an overhaul of the country's insolvent pension system. Congress and the president's economic teams are considering three different proposals to streamline Brazil's complicated tax system by combining four, five or as many as nine taxes into one.
Economists worry the Selic rate would have to rise substantially to fight price increases if the economy overheats after the pandemic. That scenario is more likely, they say, if the recovery happens before the implementation of policies meant to plug a gaping budget deficit often blamed for Brazil's history of high inflation.
Write to Jeffrey T. Lewis at jeffrey.lewis@wsj.com
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