Brazilian central bank lowers basic rate 0.25 points on more optimistic recovery data

Friday, October 21st 2016 - 02:56 UTC

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The new, market-friendly central bank governor, Ilan Goldfajn, is expected to oversee further rate cuts before the year ends.

“The available evidence is compatible with a recent stabilization of the Brazilian economy and the possible gradual recovery of economic activity”

The rate had been in a holding pattern since the last in a series of hikes in July 2015, as the bank struggled to tamp down double-digit inflation

With inflation in September now dipping to 8.48% and embarking on economic reforms to control spending and encourage investment, the bank has shifted gears.

Brazil's central bank cut its key interest rate for the first time in more than three years on Wednesday as a new center-right government's reforms fuel hopes of a recovery in Latin America's largest economy. The bank lowered the benchmark Selic rate by 0.25 points, to 14%, still one of the world's highest, and cited a dip in inflation and forecasts that a long recession -- Brazil's worst in a century -- is nearing its end.

“The available evidence is compatible with a recent stabilization of the Brazilian economy and the possible gradual recovery of economic activity,” the bank's monetary policy committee said in a statement.

The rate had been in a holding pattern since the last in a series of hikes in July 2015, as the bank struggled to tamp down double-digit inflation amid the implosion of an economy that was booming just six years ago.

With inflation in September now dipping to 8.48% and the new president, Michel Temer, embarking on economic reforms to control spending and encourage investment, the bank has shifted gears. But Brazil's rate is still far above Russia's 10% and 6.25% in India, among other emerging giants.

The new, market-friendly central bank governor, Ilan Goldfajn, is expected to oversee further rate cuts before the year ends. “The Brazilian economy desperately needs lower interest rates,” wrote Vinicius Torres Freire, economics editor at Folha de Sao Paulo newspaper, ahead of Wednesday's decision.

Brazil's lowest rates were 7.25% during October 2012 to April 2013, when the economy was growing strongly. But the GDP dipped 3.8% last year, and the economy is expected to shrink a further three percent this year.

However, prices are finally retreating. The central bank publication Focus is forecasting 7.01% inflation for the end of 2016, falling to 5.04% next year. The central bank's target is 4.5%.

The bank said it will “evaluate the pace and magnitude of monetary easing over time to guarantee the inflation rate converges toward the target.”

The recession has left 12 million Brazilians out of work, according to government statistics, and has seen the three main international rating agencies cut Brazil's credit to junk status.

Categories: Economy, Investments, Brazil, International, Mercosur.

Top Comments

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Jack Bauer
Pegging wages / prices to inflation, while almost inevitable, simply feeds it. But at some point, society as a whole has to be prepared to sacrifice , and to start adjusting salaries / prices , under inflation, in order to break the vicious circle.
If people could see a light at the end of the tunnel, they might be willing to sacrifice, but when they see politicians wasting their money and legislating for their own benefit, they tend to become sceptical when asked to “share” the burden.
Currently, stagflation would define the situation correctly. The problem with reducing the prime rate to acceptable levels in the short term, is that it would most likely fuel demand (beyond offer), provoking increases. It's become a balancing act, whereby they need to cut the interest rate and open the money tap, without letting consumption get out of control....but that is unlikely to happen right now, given the crisis and the fact that most people are still wary of the day of “tomorrow”, prefering to save what they can for a rainy day.
I cannot but agree that cheaper financing for businesses would allow them to cut costs, become more competitive and to reduce unemployment, creating a virtuous circle....some 'cheaper' credit is available, but not to all. The main obstacle to cheaper credit is the banking system, whose interest rates are pure extorsion, but in their defence, they claim that the risk (of lending) is very high. If not mistaken, more than one-third of the population, currently has unpayable debt. In this scenario, their names become 'dirty' and they are unable to finance anything ; on the up-side, they're being forced to realize that paying at sight gives them more bargaining power and comes out far cheaper in the long run. The tax system is another major obstacle - besides loads of indirect taxes, inciding on all transactions and products, payrolls are taxed at 100 % plus...and worker rights make getting rid of them, prohibitive.
Oct 23rd, 2016 - 11:33 pm +1
ChrisR
The LatAms just don't get it do they?

Why should anybody in business and wanting to expand take on loans at 20%, which is probably what would be charged by the lending bank?

Drop the rate to 5% and start the economy growing but keep the politicians sticky fingers out of the mix.
Oct 21st, 2016 - 02:11 pm 0
DemonTree
@ ChrisR
Lending at 5% when inflation is at 8.5% seems like a nice quick way to lose money.

I'm curious anyway, why do you think Brazil should do the opposite to the UK and lower interest rates to get the economy going, rather than raise them to curb inflation?
Oct 21st, 2016 - 10:43 pm 0

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