MercoPress. South Atlantic News Agency

Brazil cuts basic interest rate after 17 months

The Brazilian Central Bank cut the benchmark Selic lending rate 25 points to 19,5% from a two-year high, 19,75%. The rate reduction, the first in 17 months, follows nine rate increases since September 2004 that stemmed a surge in inflation.

The Brazilian government is forecasting a 3,4% growth in 2005 from a several years high of 4,9% in 2004.

Analysts said that a decline in the annual inflation rate to a 15 month low of 6% allowed the Central Bank to begin reducing the benchmark rate.

"Inflation guided the Central bank during the cycle of interest-rate increases, so they should stick to the same reasoning now to guide rates down'', said Adhemar Rodrigues from Santa Cruz Finance in Sao Paulo.

Brazil's 19,5% benchmark lending rate is more than double the 9,5% benchmark rate in Mexico and the 3,5% rate in the U.S. Brazil will lower its benchmark rate to 18% by yearend, according to a central bank survey of about 100 economists that was released on September 12.

"We believe that the bank had enough room for a bigger rate cut'' said Armando Monteiro Neto, president of the National Industry Confederation, the country's biggest business guild. "It was a very timid and very conservative decision", he added.

The interest rate gap between Brazil and other countries has lured money to the country's fixed-income market, sparking a rally in the currency. Brazil's real has gained 25% in the past 12 months, helping slow inflation by reducing the cost of imports.

The average Brazilian corporate borrowing rate was 33% in July, which pushes many companies to increase sales abroad to make them eligible to receive subsidized export- project loans from the state development bank, said Emilio Garofalo, a former central bank director.

"Industrial production didn't slow more because exporting remains very attractive due to lower interest rates and demand from the international market'', said Garofalo, who now works as an economic consultant out of Sao Paulo.

Brazilian economic growth picked up in the second quarter to 3,9% from the 2,9% of the first quarter.

The Brazilian Central bank has targeted 5,1% inflation this year and 4,5% in 2006.