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Brazil lowers basic rate to 9%, sixth straight reduction and more could come

Thursday, April 19th 2012 - 04:59 UTC
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Rousseff hopes lower rates will help spur spending and spark a return to high growth Rousseff hopes lower rates will help spur spending and spark a return to high growth

Brazil lowered its benchmark interest rate to a near-historic low of 9% on Wednesday, as expected, but the central bank surprised with hints that more cuts may follow to revive Latin America's largest economy.

The bank's monetary policy committee, Copom, voted unanimously for a solid 75 basis-point rate cut, its sixth straight reduction since August.

Brazil has been flirting with recession since the second half of last year, and President Dilma Rousseff has expressed hopes that lower rates will help spur spending and spark a return to the high growth rates that made the country one of the world's most dynamic economies.

Since taking office 15 months ago the bank has slashed an accumulated 350 basis points off the so-called Selic rate.

But after signalling at its last policy meeting that the easing cycle was winding down, the bank on Wednesday left the door open to more cuts, citing a benign inflation outlook.

“At this moment, the risks to the inflation trend remain limited,” the bank said in its rate decision statement.

“The Copom considers that, at this moment, the risks for the inflation trajectory remain limited. The committee also notes that, until now, given the fragility of the global economy, the contribution of the external sector has been dis-inflationary.

“Given this, and continuing the adjustment process of monetary conditions, the Copom decided, by a unanimous vote, to reduce the Selic rate to 9% per year, without bias”

“They were very dovish and inconsistent with the guidance that they provided,” said Alberto Ramos, senior economist with Goldman Sachs in New York. “They definitely leave the door open for additional rate cuts.”

Central Bank President Alexandre Tombini said this month the bank would likely cut the Selic rate to just above the record low of 8.75% and then keep the rate there for some time. Investors took his comments to mean a drop to 9%, with no additional cuts to follow.

The bank's more relaxed tone on inflation suggests policymakers are willing to wait and see whether the current easing is misguided. Abrupt changes to price trends, quicker growth or any external economic shocks could force it to quickly change pace.

While growth remains sluggish, the global economy is slowly improving as the United States recovers and dangers in Europe recede, the International Monetary Fund said this week.

Tombini agrees risks have subsided, but has stressed that the global recovery remains fragile.

Although Brazil's interest rates continue to be the highest of any major economy, analysts see limits to how much lower they might go. If the Selic falls below 9 percent, they warn, it could prompt investors to drop government bonds and seek similar or higher returns in tax-free savings accounts.

A flight to savings accounts, in turn, could raise financing costs for the government.

Faced with municipal elections later this year Rousseff's government has ruled out slashing the returns on savings accounts, a move that would be highly unpopular.

Categories: Economy, Brazil, Latin America.

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