MercoPress. South Atlantic News Agency

Brazil slashes basic interest rate to help reverse recession

Latinamerica’s largest economy should be back on the growth track in 2010 with 3.5% expansion according to the Central Bank

The Brazilian Central Bank slashed its Selic benchmark interest rate to a record low of 9.25% seeking to bolster spending and reverse recession in Latinamerica's largest economy. The one percentage point cut was the fourth reduction in as many months as policymakers struggle with the impact of the global economic slowdown.

The interest rate cut came one day after Brazil's government statistics agency, IGBE, said the economy tipped into recession during the first quarter, battered by a slide in foreign demand for its exports and a drop in domestic consumption.

The economy shrank 0.8% in January-March from the final three months of 2008, which saw a 3.6% decline from the previous quarter. In annual terms, Brazil's economy in the first quarter shrank 1.8% from the same period of 2008. A recession is technically defined as two successive quarters of negative growth.

The economy is forecasted to shrink 0.71% this year, the biggest annual contraction in at least a decade, according to a central bank survey of about 100 economists published June 8. The same survey indicated the economy will rebound in 2010, growing 3.5%.

Underlining the slowdown, IBGE said that Brazil’s annual inflation rate slowed to 5.2% in May compared to 5.5% in April and 5.9% at the end of 2008.

Rising commodity prices brought Brazil years of steady growth, but the expansion ended in October when the global crisis choked off domestic credit and slashed demand for exports.

The Brazilian Central Bank began cutting interest rates for the first time since September 2007 in hopes of reviving the economy by encouraging more spending. The expectation of further rate cuts has fueled a nearly 50% surge in Brazil's Ibovespa stock index since March, lifting it to nine-month highs.

Market analysts expect Brazilian policy makers to cut the benchmark rate a half-percentage point at the central bank’s next policy meeting on July 21-22, followed by another half- point cut at the September 1-2 meeting.

“The committee agreed that any additional monetary easing must be implemented in a more parsimonious way,” Brazil’s central bank said in a statement accompanying their decision. The monetary policy committee “will closely follow the evolution of the prospective scenario for inflation until its next meeting to then decide the next steps of the monetary policy strategy.”