Brazil lower interest rate

Brazil’s central bank said on Wednesday that the country’s recession was showing signs of bottoming out and stressed the importance of fiscal reforms as it announced another sharp cut in its benchmark Selic interest rate.

The 75 basis points cut to 12.25 per cent marked the second such cut in a row as it seeks to ease the burden on an economy that was expected to have contracted by more than 3 per cent last year.

“The evidence suggests a gradual recovery in economic activity throughout 2017,” the central bank said in a note outlining the decision.

The reduction of interest rates in Brazil, which are among the highest in the world for a major economy, are seen as essential if Latin America’s largest country is to recover from its worst recession in over a century.

The central bank began easing rates in October after inflation began dropping from a high of 10.7 per cent early last year to end 2016 at 6.29 per cent, near the top of the then official target range of 4.5 per cent plus or minus 2 percentage points.

The ceiling of the target range has been reduced to 6 per cent for 2017 but the central bank sounded a note of confidence that inflation would hit 4.5 per cent.

Brazil's Central Bank.
Brazil’s Central Bank.

“The committee understands that the convergence of inflation to the target of 4.5 per cent . . . is compatible with the process of monetary easing,” the central bank said.

Its projections have the backing of markets. A weekly survey by the central bank of economists predicted inflation would be 4.43 per cent by the end of this year and 4.5 per cent next year. Inflation in January was 5.35 per cent.

Alberto Ramos, an economist with Goldman Sachs, said the central bank comments showed there was room “for the continuation of the easing cycle but do not point to an acceleration of the pace of rate cuts”.

That would disappoint businesses struggling with some of the world`s highest real interest rates, analysts said.

“With real interest rates of 7.3 per cent, we are still among the biggest payers of real rates,” said Jason Vieira, chief economist of Infinity Asset Management, in a note.

The central bank also underlined the importance of fiscal reforms being undertaken by the government of President Michel Temer in helping to remove structural constraints to lower interest rates in Brazil.

Brazil has typically increased spending regardless of the economic cycle due to incentives for expenditure built into the constitution.

This has complicated the task for successive central banks, which have tried to put the brakes on the economy through tighter monetary policy even as governments have continued spending more.

But the government of Mr Temer has introduced a law limiting real increases in spending to zero. It is also pushing through an overhaul of the country’s generous pensions system that is expected to make the government budget more sustainable.

“The committee highlights the importance of the implementation of reforms, notably of a fiscal nature, and of adjustments in the Brazilian economy to sustainably reduce inflation and to lower the structural level of interest rates,” the central bank said.

Carlos Monteiro is a Brazilian citizen, graduated in Business Administration by the Catholic University of São Paulo. He lives in Odense, Denmark with his Danish Wife, Cathrine, and their half Danish /Brazilian daughter Ines Marie. You are very welcome to be in contact him at any time.

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