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Brazil cuts interest rate for the seventh time to a record low of 8.50%

Thursday, May 31st 2012 - 05:46 UTC
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President Rousseff, forget inflation, lower interest rates to boost the economy President Rousseff, forget inflation, lower interest rates to boost the economy

Brazil's central bank cut interest rates on Wednesday for the seventh straight time to a record low 8.50%, moving into uncharted territory in a bid to shield a fragile recovery from a gloomy global outlook.

President Dilma Rousseff has made lower interest rates one of the top priorities of her government, which is struggling to steer the economy back to the 4%-plus growth rates that made Brazil one of the world's most attractive emerging markets in the last decade.

Despite concerns among some investors over inflation, the central bank's monetary policy committee, Copom, voted unanimously to lower the benchmark Selic rate 50 basis points from 9%. That was in line with market expectations and represented a more conservative cut than the 75 basis-point reduction at the last rate-setting meeting in April.

“At this moment, Copom believes that the risks to the inflation outlook remain limited,” the bank said in a statement that accompanied the decision. The statement used the exact same language as the previous statement in April.

With Wednesday's cut, the central bank has now lopped 400 basis points off the Selic rate since August 2011, when it surprised markets by starting an easing cycle despite widespread concerns at the time about surging consumer prices.

Inflation has eased since then with some help from a sluggish global economy, bringing the rate to 5.05% in the 12 months through mid-May, well below the 6.5% ceiling of the central bank's target range.

That has allowed the central bank to test the boundaries on interest rates, ushering in what some economists predict might be a new era of lower borrowing costs for Brazil.

Wednesday's rate cut marked a slowdown in the pace of easing after two straight reductions of 75 basis points in March and April. The central bank signalled after its April policy meeting that future rate cuts might be more cautious.

The previous low for the Selic was set in 2009, when the central bank in the administration of former President Lula da Silva slashed the rate to 8.75% to fend off the global financial crisis.

Growing fears of a Greek exit from the Euro and a global credit crunch will likely prompt more rate cuts by the central bank as it tries to aid government efforts to revive activity.

Since taking office in January 2011, Rousseff has sought to bolster Brazil's economy with a barrage of tax breaks and credit incentives for targeted industries, with the latest measures benefiting automakers.

Rousseff is also trying to create conditions for Brazilian interest rates (long among the world's highest) to continue falling by keeping a lid on public spending and pressuring banks to lower rates on both corporate and individual loans.

In a politically sensitive move, her government recently scrapped the fixed rate of return on domestic savings accounts, removing one of the main obstacles preventing interest rates from falling further.

For the last century, savings accounts carried a fixed return of about 6 percent annually, which, once tax incentives and other factors were taken into account, amounted to a de facto floor for the Selic rate at its current level.

Brazil's high interest rates are a legacy of the days of runaway inflation in the late 1980s and 1990s, a traumatic era that has left policymakers and politicians of all stripes extremely wary about price stability. The Selic rate hit a record high of 45% in 1999 just after Brazil underwent a painful currency devaluation.

Categories: Economy, Politics, Brazil.

Top Comments

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  • ChrisR

    At least they are thinking about inflation.

    I do not like the comment 'to test the boundaries on interest rates,' presuming as it does that the central bank will be able to do something about inflation once / if it starts to accelerate. They will not, given the lag in data that the real world always has.

    Hysterisis was almost coined for this sort of information / reaction phase lag.

    I do hope and trust that things work out for the economy of Brasil.

    May 31st, 2012 - 04:44 pm 0
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