MercoPress. South Atlantic News Agency

Brazil cuts basic rate by half a point to 11% and says inflation converging to target

Traders believe Tombini will cut the Selic as low as 9.25% by July

Brazil’s central bank cut borrowing costs by half a point for a third straight meeting as a global economic slowdown threatens with a slump in domestic demand. The bank’s board voted on Wednesday unanimously to reduce the benchmark Selic rate to 11% from 11.5%, as had been anticipated by markets.

Policy makers said that “by timely mitigating the effects coming from a more restrictive global environment, a moderate adjustment in the level of the basic rate is consistent with the scenario of inflation converging to the target in 2012,” according to the bank’s statement posted on the central bank’s web site. The language statement was unchanged from the bank’s Oct. 19 decision.

Brazil has taken the lead among emerging markets in trying to prevent spillover from Europe’s sovereign-debt crisis. The country’s surprise interest rate cut in August, the first in two years, has since been followed by ones in Australia and Israel.

Traders are betting that central bank president Alexander Tombini will cut the Selic rate as low as 9.25% by July, according to interest-rate futures.

While the bank’s focus has shifted from the fastest inflation in six years to shoring up economic growth, Tombini has quashed bets that he would accelerate rate cuts. Last week, he said that the global slump had not yet led to an “extreme event” and repeated his forecast that “moderate adjustments” would be sufficient to address any fallout in Brazil.

In addition to lowering rates, Brazil has unwound most of the credit curbs it imposed last December to dampen a bubble in vehicle, personal and payroll loans.

Brazil’s benchmark Bovespa stock index has fallen 2.6 percent this month and is down 25 percent this year in dollar terms.

Falling industrial output and business confidence to levels unseen since 2008 are weighing on investor sentiment in Latin America’s biggest economy. Since Tombini’s first rate cut, economists have reduced their forecast for growth this year 11 times, to 3.1% from 3.79%, according to weekly central bank surveys. Last year, Brazil grew 7.5%, its fastest pace in more than two decades.

Annual inflation in Brazil slowed for a second straight month in mid-November, easing to 6.69%, in line with the central bank’s forecast that consumer prices peaked in the third quarter. Inflation has exceeded the 6.5% upper limit of the central bank’s target range since April.

Tombini said last week that inflation rates will “fall sharply” by the second quarter of next year. The central bank has repeatedly pledged to slow the annual rate to 4.5% by the end of 2012. But even as the Brazilian economy shows signs of cooling, 18% annual credit growth and full employment conditions continue to stoke consumer demand.