FOCUS-Brazil cenbank cuts rates again, to 23.5 pct
Reuters, Wednesday, May 19, 1999 at 20:26
By Shasta Darlington
BRASILIA, May 19 (Reuters) - Brazil's Central Bank took
another swipe at its key interest rate on Wednesday, cutting
the Selic even more than expected to 23.5 percent as Latin
America's biggest economy shrugs off a shock currency
devaluation.
The bank's Monetary Policy Committee (Copom) trimmed the
benchmark rate from 27 percent in its seventh cut in about two
months and maintained the bias to ease the reference rate until
its next meeting.
The Selic sets the yields on government debt and is used to
determine consumer credit rates. Analysts had expected the
Copom to cut rates to 24 percent or 25 percent.
"There were three principal reasons for this decision," the
bank's director of monetary policy Luiz Fernando Figueiredo
told reporters after the meeting, citing inflation as the main
factor.
Huge capital flight forced the Central Bank to abandon its
strict foreign exchange policy in mid-January and eventually
float the currency against the dollar. The bank hiked interest
rates up to 45 percent to fend off inflation as the real
plummeted 45 percent against the dollar.
With inflation and the foreign exchange rate stabilizing
much sooner than economists predicted, the Central Bank has
slashed borrowing costs.
Figueiredo said he expects inflation in the next four
months to come in below 0.5 percent a month. That compares with
price hikes of 1.41 percent in February, fueling fears of
double-digit inflation.
Now, both economists and the government are calling for
inflation of about 7 percent in 1999.
Figueiredo also cited solid economic performance in the
first quarter and encouraging capital inflows as the two other
reasons the bank lowered the Selic yet again.
Contrary to economic forecasts, Brazil showed signs of
growth in the first quarter of 1999, helping lure foreign
investors back. Stocks have jumped amid a fresh wave of inflows
which have also bolstered the currency and international
reserves.
Some market watchers had worried that signs of a shift in
U.S. interest rate policy could slow rate cuts in Brazil
because of concerns over capital flight from Latin America's
largest economy.
The U.S. Fed left interest rates unchanged on Tuesday but
signaled its willingness to raise rates in the future to curb
inflation by adopting a formal policy bias toward higher
borrowing costs.
The decision discards a so-called "neutral" interest-rate
outlook that has held since Nov. 17, after the Fed made the
last of three rapid-fire interest rate cuts.
"If the U.S. central bank at some point has to raise its
interest rates one, two or three times that doesn't mean that
capital flows to Brazil are going to change," Figueiredo said.
"If it happens in a significant way, that's another
consideration, but it's not the case now," he added.
shasta.darlington@reuters.com))
Copyright 1999, Reuters News Service
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