Despite inflation risks Brazil keeps interest rates at record low, 7.25%
The Brazilian central bank kept its benchmark interest rate at a record low for the second straight meeting, 7.25%, despite admitting inflation was a short term risk and economic recovery less intense than expected.
In the release the bank said that given those concerns, and continued “complexity” in the global economy, policy makers reiterated their view that the best strategy is to keep rates stable for a “prolonged period.”
Latin America’s biggest economy is struggling to emerge from two years of slowing growth as the government cuts taxes, lowers lending rates and boosts investment. At the same time that growth trails all major emerging markets, inflation in December accelerated faster than economists’ estimates for the sixth straight month and ended 2012 at 5.84%, higher than the bank’s 4.5% target for the third straight year.
After the government last week reported that consumer prices in December rose 0.79%, the fastest since March 2011, central bank President Alexandre Tombini said that inflation has proved “resilient” in the short term due to agricultural price shocks.
Officials last month announced a new round of stimulus measures, including lower reserve requirements for banks that provide credit for investment in capital goods and a payroll tax cut extension to several labour-intensive industries. In an end- of-the-year speech, President Dilma Rousseff urged businesses to take advantage of the measures and boost investment.
Analysts covering Brazil’s economy have cut 2013 GDP growth forecasts in 8 of the last 10 weeks, to 3.2%. The central bank estimates the economy grew 1% last year, less than China, India, Russia and South Africa.
One brighter spot in the economy is consumer demand, underpinned by near record low unemployment levels, though that plank is showing signs of weakness too. Retail sales in November expanded 8.4% on an annual basis, slower than the previous month.
Cia. Brasileira de Distribuicao Grupo Pao de Acucar, the country’s biggest retailer, is among companies that have seen sales falter. Its shares fell the most in two months on Jan. 11 after the company reported slower fourth quarter sales at supermarkets open at least a year.
The official release said that the “Copom unanimously decided to maintain the Selic rate at 7.25%, without bias.
“Considering the balance of risks for inflation, which deteriorated in the short term, the domestic activity recovery, less intense than expected, and the complexity that still surrounds the international environment, the Committee understands that the stability of monetary conditions for a sufficiently long period of time is the most adequate strategy to guarantee the convergence of inflation to the target.
“The following members of the Committee voted for this decision: Alexandre Antonio Tombini (Governor), Aldo Luiz Mendes, Altamir Lopes, Anthero de Moraes Meirelles, Carlos Hamilton Vasconcelos Araújo, Luiz Awazu Pereira, Luiz Edson Feltrim and Sidnei Corrêa Marques.
“The January Copom Minutes will be released in Portuguese next Thursday, January 24.”