Brazil key rate cut hailed, economy seen bright
Reuters, 06/21/2000 13:34
By Andrei Khalip
SAO PAULO, June 21 (Reuters) - Economists Wednesday hailed a surprise sharp key rate cut by the Brazilian Central Bank, saying a bright, virtually cloudless setting in Latin America's largest economy justified the move despite worries about foreign factors.
"It was a gutsy move on the Central Bank's part," said Doug Smith, chief Latin America economist at New York's IDEAGlobal.com consultants. "But fundamentals are looking really good, the inflation is low and the cut is good for debt and real economy."
On Tuesday night, the bank's Monetary Policy Committee (Copom) cut its key Selic interest rate to 17.5 percent from 18.5 percent, citing low inflation as the reason for the first cut since March and its biggest in a year.
Economists say the rate is now at the lowest level a key rate has been since the 1994 start of the economic revival Real Plan. At the peak of last year's financial crisis, which Brazil managed to put out in record time, the rate stood at 45 percent in March.
Copom also announced a bias to cut rates, allowing the bank's chairman to slash rates at will between its monthly meetings.
Odair Abate, chief economist with Lloyds Bank in Sao Paulo, among others, said he was "surprised" with the cut because the Central Bank had recently been very prudent in its rate policy in the view of external factors such as oil prices and U.S. rates.
"We are surprised, but it does not mean the rate cut is not justified. Now there's even a feeling that the bank should not have been so conservative in the past months," he said. "There is no doubt that the domestic fundamentals allow a cut."
Economists had expected the bank to keep the rate steady with a bias to lower it later, after OPEC ministers decide on whether to boost oil output to tame surging world petroleum prices, and following the U.S. Federal Reserve's ruling on rates next week.
"There is still a risk that oil prices remain high, which may hit Treasury's oil account and prop up inflation," Smith said.
But Abate was more upbeat: "Everything shows that the domestic situation is better and external risks are lower than a month ago. Inflation is getting better all the time and there's less concern about the U.S. rates, which is overpowering fears of oil prices."
OPEC ministers were meeting on Wednesday in Vienna, with the market hoping they would lift supply for the second time this year to rein in rising prices. The U.S. Federal Reserve will next week announce its decision on rates amid signs the world's biggest economy is cooling off and inflation is under control.
Economists also cited good Brazil's fiscal numbers, released earlier this week, and Tuesday's well-priced Eurobond issue as reasons for general optimism about Brazil's economic picture.
The government has taken in more tax revenue while trimming its nominal budget deficit in the first quarter to 1.7 percent of GDP, a huge drop from year-ago crisis level of 23.7 percent.
On Monday, the Central Bank reported a primary budget surplus for the first four months of 17.3 billion reais, allowing Latin America's economic giant to surpass an end-June IMF budget target with more than 1 billion reais to spare.
The good news helped Brazil launch 750 million euros in new five-year bonds on Tuesday, which were greeted as "very positive" by economists and analysts, some of whom said they expected a credit rating upgrade and another Brazil issue on the horizon.
Brazil's latest inflation data showed the lowest levels of growth in the first quarter since 1980, despite an economic expansion of 3.08 percent. In May, prices were flat.
"Internally, there is no threat to the economy in the short term," said Abate.
However, Smith and another economist recalled that in a longer run the government faced the threat of losing a high court case that could force it to dish out tens of billions of reais to workers throughout the country for index-juggling years ago.
"It is not a disaster, it will just add to long-term debt, but it remains a threat, probably the only one," Smith said.
Copyright 2000, Reuters News Service |
