Brazil cuts interest rate to 8.5%, undercutting the previous mark of 8.75% reached during the 2009 financial crisis.
Brazil’s high real interest rates, presently around 3.5 per cent, are a legacy of its years of runaway inflation and are blamed for a range of woes, including the country’s relatively low level of investment in infrastructure.
Brazil’s central bank has cut its benchmark lending rate to a historic low as part of efforts to revive growth in Latin America’s largest economy.
The central bank reduced its Selic interest rate by 50 basis points to 8.5 per cent, undercutting the previous mark of 8.75 per cent reached during the 2009 financial crisis.Explaining its decision in a brief statement, the monetary policy committee of the central bank said: “At present, there remain limited risks to the trajectory of inflation. The committee further notes that given the fragility of the global economy, the contribution from the external sector is disinflationary.”
The move will please President Dilma Rousseff, who has made slashing Brazil’s interest rates, which are among the highest in the world for an economy of its size, a central goal of her government.
The government is becoming increasingly desperate to revive Brazil’s once emerging-market like economic growth rate, which faltered from 7.5 per cent in 2010 to 2.7 per cent last year and in recent months has been crawling at an annualised rate of a little more than 1 per cent.
Brazil’s high real interest rates, presently around 3.5 per cent, are a legacy of its years of runaway inflation and are blamed for a range of woes, including the country’s relatively low level of investment in infrastructure.
Alberto Ramos, a Goldman Sachs economist, said the central bank was showing signs of being more concerned with the rate of economic growth than inflation.
“The key question is whether there is a lot more to come? Are we coming close to the end of the easing cycle?” he said.
The central bank has cut rates seven times from a high last August of 12.5 per cent, citing the deteriorating global outlook for growth.
But economists are predicting that the Selic could fall to a new low of 7 per cent, particularly if the outlook for Europe continues to deteriorate.
The government has announced a series of stimulus measures to revive manufacturing in Brazil, which has been contracting in spite of buoyant consumer demand and record low unemployment.
The recession in Brazilian industry is blamed on a strong exchange rate, a flood of cheap imports and the country’s high costs and taxation.
In other moves to revive the economy, the government has been locked in a battle with banks to pass on lower lending rates to consumers in spite of a rise in defaults.
Policy makers have also encouraged the weakening of the real, the Brazilian currency, which fell to a three-year low this month. That is expected to provide a boost to exporters.
“Enough policy stimuli have already been implemented which absent a further severe worsening in external conditions, will likely lead to a gradual, if unspectacular, recovery in economic activity,” said Tony Volpon, a Nomura economist, in a recent report.
The question is whether Brazil can sustain its historically low interest rates or whether these will rise to previous levels once growth picks up again.
Much will depend on inflation, which remains above the central bank’s target of 4.5 per cent plus or minus 2 percentage points.
But Goldman’s Mr Ramos said that with the weak economic outlook, inflation would not be a threat this year.
“I’m not too overly concerned about inflation as long as they don’t go overboard. There is a lot of inertia in the economy,” he said.
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