MercoPress. South Atlantic News Agency

Brazilian surprise: basic rate down to 9.75%, lowest in years

President Rousseff has said no efforts are to be spared to protect manufacturers from a “monetary tsunami”

Brazil’s Central bank on Wednesday surprised analysts by accelerating the pace of interest rate cuts, bringing borrowing costs to 9.75%, below 10% for only the second time on record as it seeks to revive growth.

“Giving continuity to the adjustment process of monetary conditions, the Copom decided to reduce the Selic rate to 9.75% a year, without bias, by five votes in favour and two votes for the reduction of the Selic rate by 0.5 percentage points” policy makers said in their statement posted on the Central bank’s website.

Industrial production in January had its biggest drop in more than three years as global demand slowed and a rally in the Real made imports cheaper. By reducing borrowing costs, President Dilma Rousseff’s administration is trying to fuel investment in the second-biggest emerging market after China and discourage foreigners from flooding the economy with dollars seeking higher-yielding assets.

The Central bank began lowering the benchmark rate in August after raising it through the first half of last year, saying “moderate” reductions in borrowing costs would shield the economy from the Euro debt crisis. In January the bank said there was a “high probability” the rate would drop to less than 10% as inflation concerns subside.

Since Brazil began targeting inflation in 1999, the Selic has only once before fallen below 10%, in the wake of the 2008 global financial crisis.

The 2.1% decline in industrial output in January, the biggest drop since December 2008, followed a report this week showing that the 2.3 trillion dollars economy last year had its second-worst performance since 2003. GDP expanded 2.7% in 2011, less than most of Brazil’s neighbours and even below the 3% growth posted by Germany amid the Euro crisis.

Besides cutting borrowing costs, Rousseff’s government has cut taxes on consumer goods and is boosting public investments to ensure 4.5% growth this year.

The rate-cutting strategy also helps ease pressure on the currency, whose gains are hurting manufacturers competing with cheaper imports.

Brazil’s benchmark rate is a magnet for investors borrowing at near-zero rates abroad. So far this year, 15.5 billion has entered the country, compared with investment outflows of 3 billion in the last quarter of 2011.

Rousseff, on a trip to Germany this week, said her government wouldn’t spare efforts to protect manufacturers from a “monetary tsunami” triggered by loose credit conditions in Europe and the US that are “artificially devaluing” the euro and greenback. She cited as an example the government’s recent decision to boost taxes on some foreign loans.

The Real has strengthened 5.7% against the dollar this year.

While growth and industrial production have slowed, inflation in Brazil has remained above the government’s 4.5% target since September 2010, as rising wages and near- record low unemployment feed demand. A surge in investment as Brazil prepares to host the 2014 World Cup, 18% credit growth and the government’s decision to raise pension payments by 14% are also pumping more cash into the economy.

Central bank president Alexandre Tombini has repeatedly stated that inflation will subside to 4.5% by the end of the year. Still, economists are doubtful, forecasting in a March 2 central bank survey that consumer prices will rise 5.24% this year and 5.2% in 2013. The same survey shows economists expect growth this year of 3.3%.