MercoPress. South Atlantic News Agency

Brazilian president calls on Central bank for “a cycle of interest rate reductions”

Government budget cuts are creating space for lower rates, said Dilma Rousseff

Brazilian President Dilma Rousseff made on Friday her strongest call yet for the central bank to continue cutting borrowing costs. At an event in Sao Paulo she said it was “inadmissible” for policy makers not to take into account the possibility of a recession and even a depression in the global economy.

Government efforts to contain spending are creating space for the central bank to begin a “cautious” and “responsible” cycle of rate cuts, she said.

“As the financial crisis gets worse, this time we’ll take advantage of it” Rousseff said to an applauding audience of business leaders. “We hope, and we can, initiate a cycle of reductions in the benchmark rate.”

Unlike in the wake of the September 2008 collapse of Lehman Brothers Holdings Inc., when Brazil waited four months to begin cutting interest rates, policy makers last month pre-emptively reduced the key rate even as inflation climbed to a six-year high.

“Brazil this time can’t misjudge what’s going to happen here as a consequence of what’s happening abroad” Rousseff insisted.

The surprise decision Aug. 31 to cut the Selic rate by a half-point to 12% came a day after Rousseff vowed to take Brazil on a “new pathway” of lower borrowing costs. That prompted analysts to speculate central bank President Alexandre Tombini had yielded to political pressure. Policy makers cited a “substantial deterioration” in the global economy to justify their decision.

Rousseff’s remarks echo comments from the central bank in its quarterly inflation report that “moderate” rate cuts can help shield Latin America’s biggest economy from the European debt crisis without compromising the government’s inflation targets.

Finance Minister Guido Mantega at the same event said Brazil “has all the ammunition” it needs to bring interest rates closer to levels seen in developed nations.

The same week the central bank cut the Selic rate, the government raised by 10 billion Real its target for the primary budget surplus in August, saying a more restricted fiscal stance can assist the central bank in its fight against inflation.

Mantega repeated at the even his and Tombini’s preference to use monetary policy instead of fiscal stimulus to buffer Brazil’s economy should the global crisis worsen.