Brazil's central bank cut its benchmark interest rate by 25 basis points on Wednesday, responding to cooling inflation and weakening economic momentum, while a tightly contested presidential race adds fresh uncertainty to the outlook for further monetary easing.

The unanimous decision lowered the Selic rate to 13.75%, matching the expectations of all economists surveyed by Bloomberg. This marks the fifth consecutive reduction, bringing the cumulative easing since March to 125 basis points.

In its policy statement, the central bank flagged a highly uncertain environment, noting that inflation expectations have become unanchored and that the baseline scenario carries elevated risks, warranting a calm and cautious approach to monetary policy operations. The committee said it will continue to monitor developments, keeping policy sufficiently restrictive to ensure inflation returns to target.

Presidential elections are set for weeks ahead, with multiple polls showing incumbent President Lula and Senator Flavio Bolsonaro running nearly neck-and-neck. The tight race has investors focused on how the two candidates would handle rising public debt and government spending.

Should market sentiment toward Brazil's fiscal outlook deteriorate, the real could weaken and inflation pressures could intensify. Even as the economy continues to cool, this would make further rate cuts more challenging for the central bank.

In a report released before the decision, Caio Megale, chief economist at XP Inc., noted that the magnitude and pace of the current easing cycle remain dependent on fiscal policy signals from the new government after the October election, as well as the evolution of global supply shocks.

Just hours before Brazil's rate announcement, the U.S. Federal Reserve delivered its first rate hike in three years, with the dot plot and comments from Chair Warsh signaling further tightening ahead.