MercoPress. South Atlantic News Agency

Brazil reduces basic interest rate.

After two days of deliberations Brazil's Central Bank Monetary Policy Committee, COPOM, reduced the Selic basic interest rate half a point to 26%. The much expected announcement was interpreted as a clear signal that after almost a year of persistent steady prices, inflation had reached its inflexion point and has began a moderate slide.

Copom said that the move was in response to growing indications that inflation, which in 2002 reached a seven year record of 12,5%, was under control.

The Selic basic rate has been increasing since last July almost in coincidence with the launching of the presidential election campaign that turned into a landslide victory for Mr. Luiz Inacio Lula da Silva and his Workers Party but also sparked fear among investors, bond holders and the financial sector fearing a turbulent political transition.

On the contrary President Lula da Silva's pragmatism came as a surprise but the orthodox approach of president Lula da Silva Finance Minister Antonio Palocci and Central Bank president Henrique Meirelles, --with undeniable IMF support--, obsessed with bringing down inflation, generating a budget surplus and strengthening the local currency to achieve a more palatable GDP/national debt ratio created growing unrest in the domestic market.

The insistence in keeping a high Selic rate, 26,5%, triggered a harsh debate that extended to Mr. Lula's cabinet splitting the party into the orthodox inflation warriors, and those increasingly concerned with industrial recession, overall growth stagnation, plummeting domestic demand and ballooning unemployment in metropolitan areas.

Vicepresident Jose Alencar, a successful textile industrialist openly criticized Brazilian Central Bank officials, protests were organized in several of the country's main cities and from France former president Henrique Cardoso taunted Mr. Lula da Silva saying that the Workers Party leader had intoxicated the Brazilian economy with an overdose of orthodox liberalism.

Business and consumer groups welcomed the rate cut, even when modest, but some analysts fear markets might interpret that the Central Bank yielded to political pressure.

President Lula da Silva's administration has targeted an 8,5% inflation for 2003 that at the beginning of the year when taking office seemed unattainable. However strict orthodoxy and the strong public opinion support Mr. Lula da Silva enjoys make the goal achievable.