Why Brazil cut Selic so much? Brazil is seeking to reduce its proposed budget for this year by R$55bn as part of a bid to permanently lower its historically high real interest rates, seen as a burden on its economic development.
On (February) , the government announced the cuts, equal to about 3.3 per cent of the proposed budget, in a move aimed at allowing it to meet its targets for its proposed primary budget surplus – the surplus before interest payments.“In principle, this should allow the government to meet the primary fiscal surplus target of 3.1 per cent of gross domestic product in 2012,” Goldman Sachs said in a research note-
| Brazil cuts Selic interest rate by 75 basis points to 9.75 per cent, the fifth cut in a row and more than expected 50 basis points.
Brazil in bigger than expected rate
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Brazil to cut budget in pursuit of lower rates
By Joe Leahy in São Paulo
Brazil is seeking to reduce its proposed budget for this year by R$55bn as part of a bid to permanently lower its historically high real interest rates, seen as a burden on its economic development.
On Wednesday, the government announced the cuts, equal to about 3.3 per cent of the proposed budget, in a move aimed at allowing it to meet its targets for its proposed primary budget surplus – the surplus before interest payments.“In principle, this should allow the government to meet the primary fiscal surplus target of 3.1 per cent of gross domestic product in 2012,” Goldman Sachs said in a research note.
The government of President Dilma Rousseff has made trying to reduce Brazilian real interest rates, the world’s highest for a large economy, a major policy goal this year.
The central bank has cited the weak global economic backdrop as justification for a rapid reduction in the benchmark Selic rate over the past six months from as high as 12.5 per cent to 10.5 per cent.
Economists say high real interest rates are a hangover from the country’s past days of runaway inflation as well as a reflection of the inefficiency of government spending.
Brazil’s government spends proportionally as much as a western European state but has standards of service delivery closer to that a middle-income country.
The government said the reduction in the proposed budget would not affect infrastructure investment plans and welfare programmes for low-income earners.
But some economists were sceptical the cuts would be sufficient to meet the government’s target in a year in which public service salaries and other costs are expected to rise sharply.
Itaú-Unibanco said it estimated that a R$71bn spending freeze in the budget would be necessary to offset increases in the minimum wage and investments and meet the primary surplus target.
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